Food Industry Market | Economics Dissertations


Chapter 1 – Introduction

1.1 Globalization in Food Industry background

Since last decade, Globalization is a trend in the food industry due to growing potential markets in various developing countries and changing consumption pattern of the people. Integration of international food markets and increasing expansion in international markets of the firms is the most significant trends in global economy. Market liberalization and scientific progress gave rise to globalization. Even though consumer diets are gradually changing globally; there are variations in food shopping patterns around the world which is mostly based on income levels.

The focus of food retailing industry in developing and developed countries was different with respect to consumers and the type of food demanded. The trend was that the developing countries retailers focused on high value food while the developed countries retailers focused on meeting consumer demand with respect to quality, security and choices. Thus various retailers are now looking at exploring new markets and using more opportunities in different kinds of developed and developing markets.

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Retailers have the information regarding the consumer preference and the standard of living which in then applied for research in segmenting the market according to market demand, affordability as well as quality. Hence food retail sectors is continuously growing and making innovative sale systems. The global food retail sale has increased up to $2 trillion yearly and the top 15 global supermarket companies’ account for more than 30 percent of world supermarket sales.

Bourlakis (2004) opines that “The current changes are driving food supply chains to take up coordination between producers and retailers to aid modifying products to meet consumer demands. The food supply chain progressed from series of shorter, independent transfers to more unified, coherent relationship between processors, manufacturers and retailers”.

Lubbers (1997) refer to the term globalization, meaning the global sourcing of raw materials combined with local marketing. Stalk and Hout (1990), Christopher (1992) and Hewitt (1994) suggested that “The keys to long-term competitive advantage in today’s marketplace are flexibility andcustomer response”. To maximize a competitive advantage, all members within the Supply Chain should ‘seamlessly’ work together to serve the end consumer (Towill, 1997).The effects of globalization (i.e. open markets), the market entranceof new competitors, and stricter governmental requirements for food safety and environment friendlyproduction place increasing demands on management.

This study will examine some of the food supply chain models, evaluating it whether the consumer preferences are bringing changes in the global food supply chain model. Further effort will be made to analyze the changing patterns of traditional and evolving model for existing food supply chains and how it affects the sale and demand of foods in the market.

With the introduction of supermarkets in the 21st century more and more traditional grocery outlets have suffered a fall in share from 40 percent in 1995 to 36 percent in 2005 and thus their was rise of supermarkets (Neff 1997a).Thus globalization has come into picture where more and more supermarkets are establishing in various countries due to decline in international trade barriers and more opportunities for investments as well as growth as a multinational.

1.2 Statement of The Problem

There are various factors which affect the global food supply chain pattern and every stage of supply chain undergoes some kind uncertainties which cause inefficiencies in firm’s logistics. Food industry is also facing various issues regarding proper planning of distribution system which incurred a high cost to the retailers. Due to high competition and growth in the retail sector, many manufacturers and retailers have understood that there can be significant amount of cost reduction by making improvements in logistics.

This can be achieved when the suppliers and the manufacturers work together to give better value to the consumer by maximizing costumer satisfaction and minimizing cost of distribution. Thus there is a need to redesigning a supply chain model.

UK’s Milk supply chain is one of the complex food supply chains.UK is considered as one of the largest milk producers in EU. However, the major concern for UK is that even if the UK is mainly self-reliant in milk, the value of UK exports of milk products is significantly lower than the value of imports and in 2007 the UK had a trade deficit of about £881m in dairy products. (Defra, 2007).Several reason have been estimated which has led to issues in dairy sector in UK.Thus the above issues raised a demand for further in-depth investigation. They thus form the basis for this study.

1.3 Purpose of The Study

The purpose of study is to examine the food supply chain model present in global food industry as well as UK’s milk production and supply chain in particular. Specially, the purpose of the study was:

  • To identify the changing food system pattern in food manufacturing and retailing globally.
  • To highlight conventional and developing model for existing food supply chains and to asses its affects on the global food market.
  • To find out the socio-economics impact of changing pattern of food supply chain on society.
  • To study the supply chain models and to examine how the model could be designed more effectively and efficiently in order to improve supply chain uncertainties.
  • To examine the reason of decline in the milk supplies in UK which leads to decrease in milk exports and increase in milk import even if UK is self sufficient in milk production.

1.4 Research Questions

To provide focus and direction for the study and to successfully carry it out, the following research questions have been raised:

  • a) Do the changing pattern of food distribution system have an effect on consumer and retailer’s relationship? (b) If they do, in what ways it effect the consumers? What changes should be undertaken to improve on distribution system?
  • Which are the important factors for food supply chain developments and the important characteristics of the food retail sectors, and their effects on the food supply chain?
  • What is the need to redesign food supply chains model?
  • What are the strategic, tactical and operational decision made for food supply chain decision like production and distribution?
  • How globalization in food industry has helped in growth of the world economy?
  • Has the retail sector become more powerful then food manufacturing sector?
  • What are the issues in Milk supply chain in UK? What is the reason for higher import of milk?
  • What is the percentage of production of processed milk products in UK? What are the demand and supply of these milk products?

1.5 Significance of The Study

This research work is to look at the current supply chain process in UK and evaluate the food supply chain model in order find out the changing patterns of global food supply chain which affects the consumer. Thus the study is significant for the following reasons:

First it will help shed light on the ongoing transformation in the food industry globally. It will also help us to understand certain issues which exist in different processes of supply chain management. Also findings from the study may serve as a basis for evaluation of entire food supply systems which has shifted from national to global retailing. This will help them to adopt feasible measures to improve the relationships between retailers, manufacturers and consumer.

The study will also contribute to existing knowledge on what encouraged the retailers, distributors and manufacturers to improve on the efficiencies of existing food systems. This could help strengthen retailing internalization which will further help in focusing more on increasing sale growth and market share than on profitability. The growth in private label and consumer interest brought about new changes in food retailing. In this way, the study will serve as basis for further research on the topic in the various countries as well as all over the world for the particular type of food product supply chain.

Further case study is performed on UK dairy industry. It will address the positive as well as negative aspects in this sector. It also points out the market share for each dairy product and issues in dairy sector. The study also suggests the scope for future innovations in this sector.

1.6 Organization of The Study

The study is organized in following way:

Chapter one provides general information of the study, the research problem, purpose of study and research questions and objective of study. It would also present information on the significance of the study, limitation and organization of the study.

Chapter Two presents background information and key characteristic of food supply chain globally.

Chapter Three presents a review of available literature related to supply chain. In particular, literature on the concept of changing global supply chains perspectives as well as the socio economic effect on the people due to change in food supply chain as well as relationship between society and changing supply chain will be studied.

Chapter four focuses on the dairy food supply chain model, its characteristics and future of the dairy supply chain sector. It will also focus on issues in production of milk and milk products.

Chapter five presents the summary and conclusion of the research findings. It also discusses the findings and implications of the present study and provide a conclusion.

Chapter 2 – Backgroud

2.1. Introducing global retail industry

Last year in 2007, national statistics confirmed that there were 55,540 retailers having around 103,000 retail outlets globally. The world’s major food retail companies are Wal-Mart Stores, Inc., Carrefour Group, The Kroger Co, Metro AG and many more. This company originates from different countries like US, France, Germany but they have made their mark in international markets also.

Wal-Mart being the leader has expanded in over 9 countries and operates nearly 1,300 outlets across North America, South America, Europe and Asia. After acquiring the large market share in developed countries, these major retailers are looking at developing markets like China and India. There is extreme competition in retail markets because companies are always looking for acquisition prospects for further expansion.

White et al., 2004, opined that “there is speculation that Carrefour, the world’s second biggest retailer by revenue may be in the sights of Wal-Mart, the only retailer that is bigger, which unsurprisingly, recently signalled it would like to start expanding more aggressively in Europe”. Reduced trade barriers and regulations have facilitated the global companies to enter the markets of developing economies like India while in China the government has increased the barriers in order to increase the competition between the global companies. Grocery and Food retailing are getting concentrated.

According to the Euromoniter report 2007, “the mature markets of Western European and US markets along with growing saturation in Eastern Europe have turned retailers’ focus to the BRIC (Brazil, Russia, India and China) markets, which show extraordinary growth potential”.

Retailers are developing retailing strategies by doing market research specific to a particular geographical region and then using technical innovations and marketing knowledge to develop in that area. There are large formatted supermarkets, hypermarkets and a few small sized formatted stores and grocery stores. Private labeling of the retailers brands are the growing trends now a days and they have become successful as well due to the quality of products they provide at much cheaper rates.

Worldwide: Top 30 Grocery Retailers, 2006


Rank/ Company

Country of Origin

Retail Banner Sales 2006 (USD mn)

Market Share (%)

Net Sales (USD mn) (1)

Grocery Retail Banner Sales (%)

Domestic Sales (%)

Foreign Sales (%)

1 Wal-Mart








2 Carrefour








3 Metro Group








4 Tesco








5 Seven & I (2)








6 Ahold








7 Kroger








8 Sears








9 Costco








10 Target








11 Rewe








12 Casino








13 Schwarz Group








14 AEON (2)








15 Aldi








16 Auchan








17 Walgreens








18 Edeka








19 CVS








20 Safeway (USA)








21 Leclerc








22 ITM (Intermarché)








23 Sainsbury








24 Woolworths (AUS)








25 SuperValu








26 Tengelmann








27 Coles Group








28 Loblaw








29 Delhaize Group








30 Morrisons








Total Top 30






Total Worldwide



Notes: (1) Net sales include continuing consolidating operations only. (2) Retail banner sales for Seven & I and AEON include sales for their entire international retail network regardless of local ownership. Source: Planet Retail Ltd –

2.2 Changing global consumption trends

Many of these chains of supermarkets have finally been recognized as the transformation of the population’s lifestyles on their shopping habit. There have been recent changes such as increasing smaller households, food eating habits and more of the beforehand shopping for a week due to their busy lifestyle as well as change in eating kinds of food at different timings. Recent advances in e-shopping can been seen, where there is immense competition between the retailers.

The weekly household expenditure on food and non-alcoholic drink as recorded by Expenditure and Food Survey in 2006/2007 fell from 33% in 1957 to 10.3% in 2006. The most purchased items in few decades ago included were milk, poultry and meat but in year 2006 most purchased items includes only one food item, restaurants as well as takeaways. As the observed from the trends, shopping mostly depends on the prices the supermarkets. Thus more population is seen shopping in the supermarkets where there are low and discounted prices.

People have become more aware of the health and nutrition. Thus there has been a trend in increasing the intake of the fat reducing products and increasing the intake of products which provides vitamins and minerals. However lots of the diets include fatty foodstuffs which are cheaper than the fruits and vegetable. Due to these types of diets obesity is increasing day by day and more and more people are seen unhealthy. This trend was concluded by monitoring the food consumption pattern.









oil and fats


fruits and



other foods






oil and fats

fruits and vegetable

other foods

Source: International Comparison Project Data

The major retailers Food consumption pattern has changed a lot during the years. The major food consumption trend mainly depends on the social and economic factors. In the case of developed economy, the higher calorie content and the cheaper products like potatoes and cereals have decreased while the consumption of fish and meat has increased.

The evolution of food consumption pattern and food structure changes was related to income increases measured in per capita GDP. Other factors such as consumer attitudes, marketing strategies, health concern, food prices and social environment also affects the consumption patterns. As income has increased, the pattern of food purchase has changed. Consumer eats more of some particular product and less of others.

The food retailing has changed dramatically. At the beginning, their was a transition from small food shops to supermarkets and the hypermarkets encouraged by their lower prices, long open hours and a great variety of food products. Small shop have transformed into the specialist shops which offer fresh quality product at higher prices where consumer prefers to buy only quality product.

Food habit has differences in dietary habits across various countries. Urbanization, consumer outlook about the quality of the product, demographic factors, improved infrastructure are also some of the major factors that have contributed to the changing patterns. In most of the developed countries, improved diets as well as demand of high quality products have augmented the imports of high quality processed foods.

Table: Population and economic growth by region
























United States









Western Europe



Economies in Transition



Mideast and North Africa



Rest of the World






Source: World Development Indicator, The World Bank

There are differences in consumption pattern in the different countries for example the low income country spends a greater portion their income on staple food and have immediate effects in the consumption pattern if food prices and income changes. Different lifestyles in cities and villages people had a difference in consumption pattern depending upon food availability, purchasing power as well as diet differs. Consumers also are knowledgeable and are more anxious about health and quality of food product.

There have been formations of groups in this various retail chains which are the specialty food store, food discount stores, convenience stores and other distributors like vending machines and institutions. The specialty food stores like poultry market ,bakery and other food stores has declined about 55 percent in last few decades. While the discounted food store which is also called as supermarket sells at cheaper discounted prices thus their market is grown during past years.

These discount stores also reduce the extra cost of stamps and marketing on price. Therefore growth of convenience stores has helped the medium sized grocery stores to grow. Thus there was a sudden change from the smaller shops to the retailers. Food supply distribution system starts from producers, to processors through food brokers to wholesalers, to retailers and finally to the customers. Food processors are the link between farmers and food wholesalers and retailers. Further processors sell to the wholesaler and retailer through food broker rather than their own sales forces.

2.3 Food supply chain framework

Food supply chains are complex, active, time related environment where commodity reliability is essential. The six factors which play an important role in food supply chain as suggested by M.Bourlakis & P.Weightman are as follows

  • Quality
  • Technology
  • Logistics
  • Information technology
  • The supply chain framework
  • Consumers

Quality is the degree of resemblance between what a consumer expects and what is available for them. So the most important task is to deliver proper quality products on time according to consumer and supplier expectation. For overcoming the issues in delivering quality products, quality assurance schemes, production and manufacturing to retailer’s protocols and the application of quality management systems and standards such as HACCP and ISO series are being undertaken.

Technology is always varying in the food supply chains. These technologies are undertaken for developing integrity, efficiency and ability to increase the productivity. Technology in food industry can include innovation in product development, new techniques of food preservation, instrument for detecting the foreign particles in foodstuffs or may be developments in genetic engineering or biochemistry or logistics.

Logistics is process of a single firm and it includes the external flow of materials, information and money between the businesses. Harvey (1996) and Christopher defined logistics as “the process of strategically managing the procurement, movement and storage of materials, parts and finished inventory through the organization and its marketing channels in such a way that current and future profitability are maximized through cost-effective fulfillment of orders”.

Information technology plays important role in accessing information of purchase of a particular product. There are various electronic methods found in retails which are EPOS and EDI which are found at the retailer’s outlets to measure product purchase. The Economist Intelligence Unit (1988) stated that “the benefits accruing from EDI to business as being faster trading cycles, improved inventory management, a reduction in working capital requirement, enhanced cash flow system and error reduction in supply chain system”. Also this kind of systems helps producers, retailers and suppliers to avoid the extra paperwork.

Consumers regulate the supply and demand chain which will be based on quality, type, quantity of product supplied. The efficient consumer response data is used by the wholesaler, retailers and manufacturers to discuss the about the developing efficient supply chains (Fiddis, 1997).

Chapter 3 – Literature Review

3.0 Introduction

From the prospective of global retailing, definite attempts have been made by the food retailing industry to have active relationship between the retailers and suppliers except few uncertainties. There is sudden shift in consumption pattern which has most important impact on the food market all around the world. Accordingly Food producing companies are forced to change over from push (supply) oriented production to pull (demand) oriented production (Hughes, 1994).

According to Davis (1993) and Lee and Billington (1992), “the identification of decision making uncertainties in Supply Chain decision making, and especially the identification of system characteristics that cause these uncertainties, can help in effectively redesigning such a Supply Chain”. Reducing uncertainty is achieved by understanding the root causes and how they interact with each other (Mason-Jones and Towill, 1998).This chapter looks at some interesting literature on changing traits of food supply chain globally.

In particular, the literature reviewed in this chapter includes:

  • Key characteristics of food market structure
  • Changes in global food supply chain
  • Uncertainties in food supply chain
  • Relationship between retailers, suppliers, manufacturers and customers
  • Need for redesigning of supply chain

3.1 Key characteristics of food market structure

According to Erdener Kaynak in World Food Marketing systems, 1986 the Food manufacturing, retail and supply chain industry is heterogeneous in its products ranges as well as in its structure which includes various sectors of the industry. Currently USA has got half of the world’s half largest food and drink. After US companies, UK has got the largest market share. These shares of food and drink companies are increasing day by day through vertical integration.

The world’s food companies are not perfectly structured with many huge multinational firms and many small sized companies. During the few years, it has been observed that there are many mergers and acquisition taking place in the food corporation which also affects the supply chain and manufacturing process.

Food safety is the key characteristic of food supply chain and is given a large amount of importance by the manufacturers, producers, wholesaler, retailers and the food service industry. Consumers play an important role in any products success or failure. Each of them is different having different requirements, attitudes, liking and desire. Thus these attitudes of people should be monitored and act in response accordingly. The main aspect of food supply chain is that they have to inform the consumers regarding the food risk, description of any hazard or crisis as well as act in accordance with government rules and policies.

Consumers today are upgrading their diets to include higher valued products than in the past (Regmi, 2001; Rosegrant et al., 2001).Many studies have shown that a change in food supply chain is linked with consumer preferences whereby people from higher society demand for high value food than those of lower status people.

Recent socio-economic developments have resulted in changing performance requirements for food Supply Chain’s as a whole and, consequently, for all stages in the Supply Chain. Because of demographic developments and changing social concerns (e.g. strong increase of the ageing population, more double-income families and smaller households) there is a demand for fresher products and products with higher added values.

Globally the food consumption pattern is based on the income groups present in various countries. The food consumption depends on the status, trend, and taste as well as it will depend on the quality of food eaten by a particular family. The following pyramid depicts that the various global consumption pattern depends on the income of the family.

Low income


Middle income Countries

High income Countries


Status, trend, taste

Physiological and health needs

Source: USDA Economic Research Service

Determinants of food consumption are the changes in the consumer income, in product price and in prices of paired and substitute goods as well as preferences and socio-demographic factors. In centrally planned countries, people’s diet depended status of social culture of the people. Most of countries spent their money on the import of foodstuff due to their respective existing economy. Thus the preferences of the consumer were not related to the quality and consumption of diverse kinds of foodstuffs. Thus the availability of the food product was most important part of food consumption pattern (cf.Henson and Sekula, 1994, p.422).

3.2 Issues in global supply chain

Dornier et al., 1998; Wood et al., 2002; MacCarthy and Atthirawong, 2003 suggested that “Global supply chains are more difficult to manage than domestic supply chains”. The main reason behind it is that as commodities are traded on international basis, it will indirectly increase the transportation cost as well as their will be uncertainties in the supply chain decisions because of increased lead time in the distribution systems.

The other issues of supply chain were different traditions and languages of communication of different countries which also affects the efficiencies of the processes of the supply chains like planning, forecasting. Company also faces the challenges in terms of lack of infrastructure, lack of knowledgeable manpower, technology in different countries where they are planning to invest like transports and other primary facilities required for the smooth functioning of an international firm.

Reduction in competitive advantages due to all these uncertainties is the main issue in global supply chain. Dornier et al., 1998 further stated that “Global supply chains carry unique risks that influence performance, including variability and uncertainty in currency exchange rates, economic and political instability, and changes in the regulatory environment”. While Carter and Vickery, 1988, stated that “Currency exchange rates affect the price paid for goods that are purchased in the suppliers currency and so influence the timing and volume of purchases as well as the financial performance of the supply chain”.

There are many researches going on in food supply chain modelling in order to solve technical problems as the issues are continuously changing globally. Keeney, 1994 pointed out three issues “First, firms are increasingly outsourcing to both domestic and global locations. Second, many firms that had viewed their sourcing problems myopically as an enterprise-level concern now strive to integrate decision processes across tiers in the supply chain. A third issue is the broadened definition of supply chain performance, as mission, strategy and objectives can vary considerably based on the value of the product offered to the customer”.

Other rising issues are regarding the unity in deciding on assessment in global supply chain design. According to Sherman(1998) and Lewis(1999), in practice “firms engaged in Vendor Managed Inventory (VMI) and Collaborative Planning, Forecasting, and Replenishment (CPFR) integrate replenishment planning between enterprises by sharing sales and promotion information”. Likewise, firms that implement Advanced Planning Systems (APS) may integrate production decisions across the supply chain by including supplier inventory and capacity constraints into their scheduling function, striving to avert supply problems before they occur (Rohde, 2000; Bowersox et al., 2002).

Thus these integration preparations also affects the supply chain designs and decisions. Dornier et al, 1998; Brush et al, 1999; Trent and Monczka, 2003 discusses the value and need for integration between facilities in the global supply chain. In addition they find out that an integrated, well-coordinated global supply chain is difficult to duplicate and so plays an important role in competitive strategy.

In recent times, more importance is given on reducing the cost of supply chain rather than on the performance. According to Supply-Chain Council (2003), performance is measured in terms of reliability, responsiveness, cost, flexibility and assets. Additionally, Handfield (1994) mentions five benefits for companies who choose to source globally – improving quality, meeting schedule requirements, reducing cost, accessing new technologies, and broadening the supply base.

Further Bozarth et al. (1998) suggested that “delivery performance and quality as important measures in global supply chain management”. Firms that had previously looked to their international manufacturing sites as a source of low-cost advantage now rely on their global production sites for improved access to customers, suppliers and skilled employees (Ferdows, 1997).

Another study points out that there is growing insecurity in Supply Chain decision making as to what developments to react to, and what action to take. The increase of uncertainty has led to a requirement for higher dependability and flexibility within the production systems and the planning and control systems in the Supply Chain (Handfield and Nichols, 1999). Hence this can also be the basis behind the changes in the supply chain model in global food industry.

Supply chains are those systems which are mostly used for spreading important information from consumers to food producers, as well as to farmers and distribution systems. The most important stages of a supply chain are production, processing, input supply and retailing. Thus managing the supply chain is not remained at national level but that outsourced in outside world to get the benefits of lower tariffs, trade barriers as well as lower cost of production.

That is the main reason behind this supply chain to get transferred globally. Consumers are demands for convenience is increased which has increased the demands and will overtake global retail food sales in the future. In the same study further it is pointed out that “increase in acquisitions of refrigerators may lead to greater household purchases of perishable food products, while increases in ownership of microwave ovens may lead to increased purchases of ready-to-eat foods that require minimal preparation due to which there is higher demand high value food. The problems faced by food suppliers are not new, but recent research on supply chain design and management puts them in a new light”. (Venturini and King 2002, p. 58).

Food retailers in the developed economies like United Kingdom have been the best in the expansion of high-quality private label products that shift brand identity from the food manufacturer to the retailer. Davidson, 2003 opined that “While changes implemented by U.S. retailers in response to consumer demand include a marked increase in new products on store shelves, a rising prevalence of one-stop shops combining grocery and gasoline operations, and wider selection of prepared foods in store deli sections”.

In response to increasing consumer demand for safety, quality, and convenience in food, retailers have adopted more proactive marketing strategies, where they try to achieve customer loyalty not only by improving service, location, and store layout but also by having more influence on the overall, value creation process in the food chain. More recently, food manufacturers have used the health criterion in the development of “functional foods,” food products that have an added positive health benefit (Frewer et al., 2003).Even though the type of health claim will have an impact on consumer food choice, the degree to which a health claim affects consumer choice is dependent on the consumer’s interpretation of the claim based on personal food health theories (Bech-Larsen and Grunert, 2003).

Despite the apparent benefits to consumers, proliferating product assortments are making it more difficult for manufacturers and retailers to predict which of their goods will sell and to plan production and orders in response to customer demand. As a result, the inaccuracy of forecasts increases along with the costs related to forecast errors, such as extensive inventory and stock out costs (Fisher et al., 1994).Hence it is no longer possible to cope with uncertainties by building inventories, creating slack in time or by providing additional capacity (Newman et al., 1993).

Supply Chain Management provides the opportunity to reduce decision making uncertainty in the SC, which management has considered as unchangeable ‘givens’ up to now(Silver et al., 1998). Partnerships with key suppliers and customers will reduce uncertainty and complexity in an ever-changing global environment and minimize risk while maintaining flexibility (Handsfield and Nichols, 1999). Hence there is a need for analyzing the current supply chain and then make an effort to point out critical points and then redesign these models for better consumer and manufacture relationship.

There are various walls between the stages of supply chain which should be broken so that the uncertainties may be decreased which may result into availability of more information which can control the possibility of uncertainty in every step of management. Further it would help the management to estimate the alternative action against this uncertainty on supply chain’s performance. Thus the system would be managed properly and supply chain objectives would be achieved. Some factors which brought about competition amongst the retailers.

Takeaways and food services

Retailers and other supermarkets are also facing competition from various international restaurants and takeaways. Globalization in international food services in 1960 started by Burger King and MacDonald’s and they were the first ones to explore International markets. Senauer.B and Venturini, L. (2005) found out that “McDonald’s is by far the most globalized of the restaurant chains with over 15, 000 outlets in other countries and international sales of almost $20 billion”. All these US food service companies like Burger king, KFC, Starbucks, the coffee house chain, is expanding in Europe and Asia.

Mckinsey and company also suggested that the share of food spending in the traditional grocery outlet will fall from 40 percent in 1995 to 36 percent in 2005(Neff 1997a).Casper 1997, noted that “purchased meals from the restaurants were eaten more outside the premise then inside it thus takeaways gave great deal of competition to the supermarkets”.

Thus to achieve that percentage of market share, supermarkets were keen on selling more ready to eat foods and easily prepared meals. These categories of food service companies have the policy of Franchising, Partnership ventures or licensing agreements. The study done by Masur, 1997 found that “foreign franchised outlets became profitable in an average of 16 months, whereas company-owned ones required 25

Months”. Thus developing good customer relation and business knowledge can help food service companies to enter in new markets. Profit sharing in this kind of business helps in more profit generation by the partners. The main focuses for such businesses is having the local cultural awareness and develop new food products liked by the people living in that region as well as adjusting price depending on income levels of population.

Strategic Improvement in supply chain

Modernization in the food distribution system means the creation of vertically and horizontally integrated distribution systems and the appearance of technical innovation in food retailing and wholesaling (Erdener Kaynak, 1986).Vertical integration with respect to the distribution system has helped to rupture the monopolistic pattern by directly getting in touch with the producer. The food processing industry has gained various advantages by undertaking vertical integration like

  • Reduction in the selling cost which would be further used in efficient distribution systems.
  • Demand and supply efficiency would increase when a new product is launched.
  • Good quality products can be purchased with lower production cost due to vertical distribution system.

Since 2000, there is a huge boom of Supermarkets which has thrown light on many problems in supply chain. Thus to make supply chain more efficient, supermarkets have started adopting various strategies like reducing the cost through improved logistics. Every stage of logistics like production, wholesaling, retailing should be properly organized and develop for efficient supply chain.

ECR is mainly efficient consumer response which will help the suppliers and manufacturers to work closely together to in order to bring about effective customer satisfaction as well supply chain cost minimization. Thus if ECR is correctly estimated than the data can be further used by stages involved supply chain which will help them to find out the uncertainties and take proper decisions. The estimated amount of earning by using the ECR was about 15billion pounds (Kurt Salmon Associates)

Source: The ECR system (adapted from Kurt Salmon, 1993).

The other strategies which can be used are effective replenishment providing the right product to the right place, at right time, in the right quantity and in the most efficient manner possible (Kurt Salmon Associates 1993 p.45.).With improved ordering, better production, advertising& promotion, maintenance, improved backroom and warehousing can save around 2.5 per cent of the company’s expenses.

Effective promotion is also a strategy which can be used for improving supply chain. Thus promotions include deals like store adverts, organizing customer’s demands, giving more options and offer more interesting deals to the customers, keeping accurate records and reducing supply cost. Thus industry cost can be saved up to 4.5 percent by effective promotion (Larson, 1995). Thus the saving achieved from effective consumer response may help in improving company’s logistics. Mathews, 1994 suggested that “Manufacturers and retailers would almost equally divide 76 percent of the operating cost reductions”.

Growth in private brand

Since many years, different companies are working with retailers to sell their products under the retailer’s label which has given rise to brand as a whole. This was due to unexpected economic recession in 1990’s and market was not able to recover their expenses. Costumers however were quite satisfied with products sold under private brand because of the quality and services they provided and they didn’t mind to spend extra money on the product.

By 1996, private label dollar sales were $33.9 billion and 20.2 unit volume of the supermarkets (Food Institute Report, 1997).Thus competition between the private brand and the branded products increased which gave rise development of various strategies by branded labels like Procter and gamble to reduce the advertisement, production, wholesaling expenses. Supermarkets mostly use the sale as well as normal prices to attract the customers.

ACNielsen global service report, 2005 suggested that across the 38 countries the Private Label sales accounted for 17% of the value sales over the 12 months ending the first quarter of 2005. In comparison to year ago, Private Label sales grew by 5%.European leads in the private label category which is up to 23% and it is still growing. Europe is followed by America and other markets which accounts for 17%.Private label is expanding more into ready meal and refrigerated products which accounts for about 47% and 32% respectively. Following chart shows the private label share and growth globally.

Share and Growth Rates of Private Label by Region


Private label share Private label growth

Source: ACNielsen Global Services September 2005

Consumer preferences and concern

Consumers have become more advanced and are demanding more of ready meals ,including the quality and freshness because of the changing lifestyles and growing income. Consumers are questioning the ability of the modern food system to provide safe food (Smith and Riethmuller, 2000; Tansey, G. and Worsley, T., 1995).

According to Speer (1995), an environmentally prepared product interests the consumers. Normally consumers have a better understanding of the amount of nutrition they require but there is also market is also segmented with respect to individual taste. Organic, traditional and exotic foods are changing the trends in the markets taste.

Along with the taste and quality, consumers are also concerned for food safety and appropriate labeling. In recent times, there have been various incidents due to which consumers have become more concerned about the food handling practices. Many things are also said about genetically modified food which is unacceptable to the consumers. Morgenthau, (1997) indicates that illness caused by the bacteria-contaminated hamburger, strawberries, apple juice, raspberries, alfalfa sprouts, ice creams and other products which further shook consumer’s confidence.

In addition, he points out that the new technique to find out the pesticides residues would further lead to greater inspection of the food company. Underhill and Figueroa in 1996 revealed the results of a regional survey of 534 households that 71 percent believed that the residue in food presented a serious or moderate health hazard.

Miller (1996) opines that organic food sales doubled in 1996.It was also found that if discount stores started marketing of organic and other unconventional foods then their sales may also rise.Reicks, Splett and Fishman (1997) conducted in store experiments and found that in store experiments for some organic product in discount warehouses stores sales increased 233, 555, 225, even 2260 percent above control store levels when they used point of purchase signs.

Thus many food processors have also started marketing organic food. Ronald Macfarlane (2002) stressed on the following present issues with the consumers like use of irradiation techniques, use of food additives like Monosodium glumate,genetic modification and presence of pesticides residue in foodstuffs.

Managing supply chain

Harland (1996) describes supply chain management as “managing business activities and relationships (1) internally within an organization, (2) with immediate suppliers, (3) with first and second-tier suppliers and customers along the supply chain, and (4) with the entire supply chain”. Yet another author has expressed their opinions regarding what does supply chain management actually includes. Scott and Westbrook (1991) and New and Payne(1995) also suggested that supply chain management as “the chain linking each element of the manufacturing and supply process from raw materials through to the end user, encompassing several organizational boundaries”.

Van Rijn and Schijns (1993), Rutten (1995) and Den Ouden et al. (1996) sum up a list of specific process and product characteristics of food Supply Chains.

Table 1.1 Overview of the main product and process characteristics of food supply

Supply Chain stage

Product and process characteristics


• Shelf life constraints for raw materials, intermediates and finished products and

changes in product quality level while progressing the SC (decay)

• Recycling of materials required



• Long production throughput times (producing new or additional products takes a lot of time)

• Seasonality in production

Auctions /

Wholesalers /


• Variability of quality and quantity of supply of farm-based inputs

• Seasonal supply of products requires global (year-round) sourcing

• Requirements for conditioned transportation and storage means

Food industry

• Variability of quality and quantity of supply of farm-based inputs

• High volume, low variety (although the variety is increasing) production systems

• Highly sophisticated capital-intensive machinery focusing on capacity utilisation

• Variable process yield in quantity and quality due to biological variations,

seasonality, random factors connected with weather, pests, other biological hazards

• A possible necessity to wait for the results of quality tests (quarantine)

• Alternative installations, alternative recipes, and product-dependent cleaning and

processing times

• Necessity to value all parts because of complementarily of agricultural inputs (for

example, beef cannot be produced without the co-product hides)

• Necessity for lot4 traceability of work in process due to quality and environmental

requirements and product responsibility

• Storage buffer capacity is restricted, when material, intermediates or finished

products can only be kept in special tanks or containers

3.3 Uncertainties in supply chain

The main causes of uncertainties are the alleged demand, value of information and delay to supply as suggested by Lewis and Naim, 1995.Lee et al (1995) found out additional causes which occur in the uncertainties in supply chain like price fluctuations driven by promotion, order batching, place orders with multiple firms and cancel order when inventory arrives.

Further McGuffog (1997) states that even when customer demand is stable, institutional factors (including structures and timetables, computer systems, capacities of machines, depots or vehicles, etc.) or random factors tend to make the demand expressed at each sub-sequent stage upstream in the supply chain more cyclical and extreme in variation.

This phenomenon, in which orders to the supplier tend to have larger variance than sales to the buyer (i.e., demand distortion) and the distortion propagates upstream in an amplified form (i.e., variance amplification), is called the Forrester effect (Towill, 1996) or the bullwhip effect (Lee et al., 1997). This effect has serious cost implications.

Lee et al. (1997) examined the bullwhip effect in several case studies and identified four

major causes: demand signal processing (if demand increases, firms order more in anticipation of further increases, thereby communicating an artificially high level of demand which is worsened by long lead times); order batching (due to fixed costs at one location); price variations (which encourage bulk orders); and shortage gaming (there is, or might be, a shortage so a firm exaggerates orders in the hope of receiving a larger share of available items). Thus, the effect may be caused by reactions to uncertainties in demand or supply and the complexity and structure of current decision processes.

Stalk and Hout (1990) found that work-in-process and stock levels move up and down with the length of the order cycle time, and the way forward is to attack lead times as a high priority, knowing that all other major performance indicators will follow. The idea is that if forecast horizons are shortened, forecast errors will also decrease. Hence, the control problem becomes more manageable. As a rule of thumb, Stalk and Hout (1990) found that reducing the lead time by 50% will reduce the forecast error by 50%.

Van der Vorst et al., 1998 found out that “From a review of quantitative and more qualitative, managerial literature, four clusters of sources of uncertainty are identified: order forecast horizon, input data, administrative and decision processes, and inherent uncertainties”. For each source of uncertainty, several principles for improving operational performance are identified.

By breaking down the walls between supply chain stages and enlarging the supply chain system, the supply chain management can reduce decision making uncertainties (Silver et al., 1998; Van der Vorst., 2000).

De Leeuw (2000) expresses the view that supply chain uncertainties are based on the following five requirements.

  • Managing systems should have an objectives and corresponding performance indicator for managing the supply chain.
  • For the estimation of future supply chain one should have appropriate information about the current supply chain scenario.
  • There should be enough information processing capacities to process information.
  • For proper management of supply chain, firm should understand the effects of alternative actions. They should also posses the supply chain model which will frequently suggest them redesign variables and performance indicator.
  • There should be enough potential actions to manage the objectives of supply chain.

Thus if all these requirements are not met the firm may face uncertainty in the supply chain management.

3.4 Relationship between retailers, suppliers, manufacturers and customers

According to DeWulf et al., 2001;Sirohi et al., 1998; Srivastava et al., 2000., “Retailers are realizing more and more that it pays off to invest in customer relationships”. Partnership with key customer and supplier reduces uncertainty and complexity in an ever changing global environment and minimize risk while maintaining flexibility (Handfield and Nichols, 1999).

Various theories has been developed to understand the theory of buyer and supplier

by Thomas (1976). Thomas (1976) presented “a process model which describes conflict processes in terms of two dimensions: desire to satisfy own concerns and desire to satisfy others’ concerns”. Manufacturers and suppliers are developing healthy relationship among themselves because it facilitates them to be more efficient and more effective (Kalwani and Narayandas 1995).

Hakansson, 1982 recommended that “by developing relationships with their suppliers, buyers and sellers can both achieve cost savings through reduced search and evaluation costs , reduced transaction costs and the learning effects and relationship specific scale economies” (Gundlach et al 1995).

Han et al 1993s and Cunningham and Homse, 1982 said that “Customers can anticipate improved access to a more reliable supply of inputs, improved product quality and performance, and a higher level of technical interaction in the form of information exchange, potential product adaptations and technical assistance”. However, the major reason for developing associations with suppliers is that customers recognize that suppliers create value. Developing long-term relationships can improve access to markets and more reliable market information (Low 1996).

Buyers and the seller’s relationship should be based on the following characteristics:

  • Fulfillment of demands and satisfaction
  • Long term supply relation and Trustworthiness
  • Contributions and investments
  • Brand awareness and brand equity

3.5 Need for redesigning of supply chain

There is a need of redesigning of supply chain because that will decrease the demand augmentation and hence progress the supply chain efficiencies. This can be done by removing postponement of goods supply, by swapping information on market requirements, by removing intermediate echelons as well as by taking right decisions and modifying different actions. The growth was seen by the supermarkets and producers that there can be reductions in the infrastructure cost by redesigning the supply chain model.

Stalk and Hout (1990) is of the opinion that the key to long term competitive advantage was flexibility and customer’s response. Thus to increase the chances of competitive advantage all members should work together to serve the consumers (Towill, 1997). Newman et al., 1993 was of the view that supply chain uncertainties cannot be overcome by building inventories or creating slack in time.

These anticipations of uncertainties lead to increased logistic costs and a reduction in the flexibility of the production organization (Durlinger, 1995).Thus the way to increase the profits depends on the customer’s response and thus supply chain can be improved. Eloranta et al., 1995 suggested that improvement can be brought about by reducing the inventory cost, indirect and direct labour cost as well as increasing sales margin and revenue at tactical and strategic level.By undertaking customer driven responses, supply chain can improve on their profitability.

According to Global supply chain forum and Lambert et al 1998, supply chain management integrates business processing from end-user to original supplier and it provides product service and information that adds for customers and stakeholders. Fischer (1996) suggested that “Uncertainty can take form of high variability in demand, process or supply which in turn creates a problem in planning, scheduling and control that jeopardize delivery performance”.

Next chapter will introduce the dairy system in UK and the current issue as well as it discusses the research questions, the source, nature of data and methods used.

Chapter 4

Case Study: UK Dairy Food Supply Chain : Introduction, Methodology, Analysis and Results

4.1 Introduction

This chapter will critically analyze the trends in dairy consumption pattern in UK.Thus the main objective of this paper is to outline and narrow the global food supply chain research on the specific category of dairy products consumption pattern and then finding out uncertainties in the UK dairy supply chain for the further research.

It would further help us to understand the major factors for the convergence of the global supply chain into one particular category. This would support supply chain for better management and efficiency as well as encouraging more innovative developments in the dairy supply chain.

UK is the 9th largest producer of milk in the world. Its dairy industry is mostly a semi-intensive domestic animals industry. According to DEFRA, the UK Dairy Industry covers around 18% of UK’s agricultural production as well as it comprises of largest agricultural sector of around £3.2 billion. The estimated annual production of milk is around 13.7 billion litres.

Presently the number of herd is around 2million and the average herd size is around 125.9 cows per herd. When compared to the average herd size of EU which is mostly 41 thus UK is growing entirely in dairy sector. Out of the amount of overall milk produced, 49 per cent is used as liquid milk; 26 per cent is used in cheese productions which are the largest milk processed products in UK.

Utilization of milk for production of milk products (2000/01 and 2006/07)

Source: Defra, 2007

4.2 Characteristics of dairy supply chain in UK

According to the research, co-funded by the Milk Development Council and government department Defra, “the supermarket’s strong bargaining position is largely due to three key aspects of the industry structure: the competition between milk processors; the purchase of milk under the supermarket’s own labels; and the supermarket’s ability to source from outside the domestic market if necessary”.

Dairy supply chain forum (DSCF, 2008) and Department for Environment Food and Rural Affairs (DEFRA) pointed out few characteristics of UK dairy supply chain which are as follows.

1. UK dairy farms produce between 13 and 14 billion litres of raw milk each year. Around six billion litres of that is processed into liquid milk – mainly for drinking.

2. England has approximately 10,000 dairy farms, with a further 6,000 in Scotland, Wales and Northern Ireland, all ranging in size. The average English dairy farm has 100 cows.

3. Although there are more than 100 dairy processors in the UK, seven major milk processors account for more than 90% of the UK’s liquid milk supply. They sell bottled milk to the main grocery retailers, food service companies and for doorstep delivery by the milkman.

4.3 Dairy supply chain model

The dairy category is amongst the fastest growing categories in the retail sector and grew 10.7% in 2002 compared with the previous year (ACNielsen 2002a). Boehlje & Schiek 1998; ACNielsen 2000, 2002a, 2002b suggested that “four key factors were shaping the dairy-food supply chains in recent years are Deregulation, Consumer awareness,

Need to capture supply chain efficiencies and control costs and Environmental sustainability”. Food safety and quality are major concern in the supply chain. All of the major supermarkets now require fresh produce to come from suppliers who comply with the food standards code and good manufacturing practices (Coles Myer Ltd. 2003a; Woolworths Limited 2003b).

Collection of milk is done daily from farms by the wholesale milk contracters.These purchasers collect the milk on daily basis from the farmers and the cost per litre is fixed. This milk is then transferred to the chilled storage tanks which are bulk transport tanks which are either from the farm to the dairy or via a ‘transshipment depot’ (the insulated tankers but not refrigerated).

Defra 2007a noted that “the raw milk may pass through transshipment depots on its way to the processing plant. Imports account for a relatively small proportion of all liquid milk, although imports of organic milk are reported to be rising”.

Organic milk supply chain is totally different as they have altogether different chain of suppliers which are called as a dedicated co-operative for organic milk suppliers which handles half of supply chain and other dairy processors handles half of it. “Source specified milk” is the milk supplied by contracted farmers to particular retailers. Below figure denotes dairy supply chain model.

Source: Adapted from Spekman, Kamauff Jr & Myhr (1998)

4.4 Issues in dairy sector in UK

The UK dairy industry is in the middle of period of dramatic disturbance, which is undergoing the elimination of Milk marketing Boards (MMB’s) and transforming into monopolistic competition in milk marketing which has created ‘free market’ in milk. Thus the board was replaced by dominant farmer members.

This led to removal of ‘formula pricing’ system which was considered to be anti-competitive which resulted into UK export low-value products (such as skimmed milk powder) and imports high value fresh products(yogurts) as suggested by Barry Wilson, Bruce Trail and John Strak in 1995.

The foot and mouth disease is major concern for UK dairy sector because it decreases the milk production as well as exports of milk from the affected animals are not accepted which reduces the exports. This in turn reduces the demand of the milk and milk products which further decreases the income from this sector. Like all the agriculture related supply chains, the dairy supply chain, is complex.

The first stage of dairy supply chain starts with raw milk production and then the final stage is marketing and retailing of various milk and milk products Consumption of dairy products during the previous decade has been affected by alteration in the lifestyles of population in UK and therefore their was the higher demand for healthier foods which has negatively affected the consumption of some traditional dairy products, for example high fat cheese, whole milk, butter, favoring the emergence of new products, in particular low fat, low calorie foods, like light cheese, skimmed and semi skimmed milk and yoghurts (Senauer and Kinsey, 1992).

Thus there is more demand of new innovations in these healthy products like development of new flavors and more complex products like biological products, yogurts and aromatized milk which would help in growing the dairy markets.

The other factors which are responsible for changing dairy market demand are the changes in demographic factors, ageing of the population in UK which led to profound modification in most profound modifications in most preferred characteristics for example with the emergence of lactose reduce products (Boccaletti, 1997).The sales in dairy had decreased from year 1991-1995 due to economic recession and fragmented nature of market in that period which completely changed the consumer preferences.

Few years back as compared to other countries UK is facing decline in milk production which has hit 37 year low in milk production while the production in June was down by over 20million litres same month last year (by dairy reporter, 2008).The main reason for the lower milk production is the due to improper supply of fresh products to the market. There is lots of demand of dairy in the UK as well as people are willing to pay for the premium quality products. Following plot shows average daily production of milk in UK.

Source: RPA, 2008

The traditional products like full cream, butter, liquid milk were affected before while cheese consumption remained unchanged through the years. While the other milk products like low fat liquid milk, mozzarella cheese, yogurt and other dairy products gained a lot of demand. When the dairy product demand was decreasing that time UK government were giving incentives to the farmers to carry on with more production. Thus there was policy implications which led to quotas in1984.Thus the production of milk decreased to about 15%.

Table 7.5 presents the market shares for milk and dairy products in the UK. Following table indicates UK dairy products market share.

Milk products

Market shares (% on value sales) by broad dairy sectors in UK




Butter Total






Source: Market Research Europe, 1996

The UK dairy herd consists of approximately 2,066,000 cows (MDC, 2007, based on the 2006 June Agricultural Census), producing around 14 billion litres of raw milk per year. Year-on-year trends are for a decreasing number of cattle, on fewer farms, producing a roughly equivalent output of milk (DEFRA, 2007). Currently dairy processors have researched that the modification of new innovative value added dairy products will need more in-depth research and development spending, an increase in promotional and marketing expenditure and branding.

New brands which are willing to enter the milk market are finding it difficult to enter in this market due to resulting barriers brought about by existing brands. Currently, branding and advertising are mostly done for butter than they are for cheese in the UK Advertising expenditure for cheese is 1.5-2% of the total value of the cheese market, however, given that over 70% of the market is unbranded, the average expenditure of the leading brands is higher than that at 3-5%.

The top advertising companies in 2000 were Kraft (USA), Fromageries Bel (France) and Golden Vale (Ireland), which together accounted for about 80% of total advertising expenditure in the UK cheese market (UK Milk Report 2000/01).Currently the dairy sector is more inclined towards the production of Milk products like butter, cheese, flavored yogurts, cream, ice creams and milk powders.

Thus there is higher competition and demands between the manufacturers and the market for milk products. Thus they are undertaking cost reductions in supply chain like transportation and collection costs which has resulted into maintenance of careful sourcing and direct deal particularly for large and/or local dairy farmers. Therefore UK milk manufacturing companies should concentrate to increase the level of product differentiation, branding and advertising in milk and milk products.

4.5 Milk Quotas legislations

Milk quotas were started in the year 1984 in order to properly manage the production of milk and milk products across the European nations. Thus excess production of milk during that period gave rise to milk quotas regulations. The system was established in order to lessen the charge to EC taxpayers for intrusion in the dairy production market. Quota is defined as the amount of milk in litres that a quota holder can deliver or sell direct before being liable for a levy (RPA, 2007).

Quota system works on national level and each member of the state is offered a national quota in which each farmer has its own individual quota. A producer’s quota gives details about the amount of milk a farmer can sell without paying any tax. The Quota years starts from 1 April till 31 March. Their can be transfer of quotas between the milk producers as well as new producers have to make new provisions to list into the quota system as there are no ways new producers can enter the milk market. The excess marketing of milk exclusive of allocated milk quota can lead to requirement to pay excess tax which is called milk supplementary levy.

There are two types of quotas which is basically wholesale quotas (delivery of milk to approved milk purchaser) and direct sales quotas (selling milk directly to the public).Both these quotas have its own regulations but both quotas can be converted into one another. Also the producers can raise or reduce their quotas by levying or transfer of quotas. Along with concentrating on the under and over production of the milk, the producers have to pay a special attention on amount of fat, protein constituents standard requirements of milk produced.

Inefficiencies in milk quota system

  • Overproduction of milk gave rise to higher supply of milk which further facilitated greater marketing of milk which resulted into exceeding the quotas available to each producer higher tax payment. Thus overall inefficiency was seen in the system. Overproduction may be know depending upon the number of cows, its productivity, seasons for growing the feed and the cost of milk production.
  • Failure of producers to meet the specified quota which leads to payment of penalties on over and under production of milk. This may lead to gamble of quotas without any penalties.

Dairy Facts and Figures (Federation of Milk Marketing Boards (1988) p. 84) partially explains the underproduction as: “In some cases, this represents persons who have acquired quota but have not so far commenced milk production, or producers who have ceased milk production but have not sold their quota. Others many have purchased additional quota in order to expand in future but have not yet raised their output up to their new quota level”.

As the quota system is prolonged, the changes in demand of milk and milk products will have effect on its prices due to limits on milk production provided by the milk quotas. But for different milk products the demand is changing so the quota system cannot be applied to it due to competition amongst different milk products. Thus changes in demand are heterogeneous.

4.6 Research Methodology

4.6.1 Introduction

Their have been various inefficiencies in the quota system due to which producers of milk in UK are facing problems regarding the milk price and the production cost. According to the quota system which has been extended till 2014, Farmers are being charged extra tax if they have higher or over yield annually for milk marketing. Thus to avoid these penalties a specific technique should be undertaken to forecast the annual milk production.

The hypothesis for carrying out this research was if the farmers can predict the milk production in order to avoid the penalties caused due to under and over production of milk under the quota regulations.

Thus by forecasting the annual production, farmers will be able to maintain their production in relation to the overall effort like production cost, prices, fodder etc.Thus these econometric model will help in proficient assessment of farm as well as will lead to efficient management in production. Hence depending on the over and under production, various techniques can be implemented in terms of herd feeding practices so that production remains optimum. In particular, this chapter presents the research design, the study of dairy production yield and the various techniques like regression analysis and models were used for research.

The three key factors which are responsible for the quality milk production are

  • Milk produced in per hectare
  • Milk produced by per cow
  • Milk produced in per farm

These factors are mostly correlated with farm soil types and management options as said by Kerr et al. (1995a).Mostly the dairy farms are located in North West and South of England as well as in south Wales which is mainly costal as well as hilly region. Thus there is no much available data based on the farms soil types and the size of herd in these regions. Further in the research, Kerr et al. (1998) suggested that “A great deal of the milk produced on the average farm is obtained from off-farm inputs, i.e. feed such as concentrates imported from other farms”

Dependent variable is milk produced per farm because the estimates of production per cow will be tedious and unmeasurable.Depending upon the strategies used in every farm level, the production criteria will vary accordingly. The strategy that can be used is by milking many cows and getting lower production and viceversa.Thus the variable considered was milk produced per farm.

This study will mainly use the regression analysis and chow test analysis for the estimation of production patterns. The data obtained consist of Average size of herd, Average yield and total milk production in million litres from year 1995 till 2008 which is between the quota periods of April till March. This future estimation of annual production of milk is done by finding the amount of inputs put into the dairy farms. These variables were further included in multiple regression model. Depending on the nature of the available data, methods will be selected accordingly and will be the basis of this analysis so as to contradict the outcome of present literature.

4.6.2 Methodology

The data is obtained from the milk statistics available on official site of Defra ( stepwise regression was used to recognize the variable which influence the milk production. The variables like the average herd size and yield should undergo the significance testing in order to find its affect on overall milk production. Thus the significance level tested should be around 95% which will give the variables effect on milk production.

Kerr et al. (1995a) identified the independent variable which includes Average number of cows milked per day, total farm areas in hectares, energy from concentrates which was estimated in joules. Thus regression analysis was applied in order to find out the factors which will affect the production of milk in dairy farms. The gamma type curve based on Wood (21) can be used to estimate the daily milk production.

Some studies have found out that the gamma like function will not be able to estimate the daily and weekly basis of milk production and this may bias the production curve. The other model which can be used was based on the average of the milk produced. There is comparison done based on the average of milk produced on that day with the milk produced during the few days.

is forecast of y at time t on yield between time period

is the forecast error which is the difference between and

Box and Jenkins described the running average model is a stochastic model belonging to the class of the autoregressive, integrated, moving average (ARIMA) models. ARIMA model is based on weighted averages of the yield. Thus the main objective will be analyzing the time series yield data based on the chow test to forecast the further milk production

In many economic applications which model is appropriate for two different samples is important aspect. Chow test is mainly an econometric test to determine whether the coefficient is same in different samples in linear regression model. Testing the equivalence of two regressions is called as chow test.

Checking the valid hypothesis of the test that the variance of error term is common between two different samples is crucial. Test is carried out by creating an intercept and slope dummy for every variable in the model and then jointly testing the significance of dummy variables coefficients using an F-test. Chow test is mostly used in time series analysis. This test is ideal until variations of variance if at least one of the two samples size is large.

The Chow test is commonly used to test for structural change in some or all of the parameters of a model in cases where the disturbance term is assumed to be the same in both periods.

For the data analysis and to confine qualitative characteristics in the model, dummy variables are used. They can take the form of either 1 or 0, and indicate the presence or absence of a characteristic. That is, a dummy variable D is

D= 1 If a characteristic is present, and

  • If a characteristic is not present.

This dummy variable can be used to see the effect on intercept, or slope or both within a regression equation

The data contains 40 observations having two main parameters which are further subjected to regression. And the regression model is given by

yt = β1 + βxt+ et

Further two intercept and slope intercept dummies were created which will have four parameters which becomes an unrestricted model. While the restricted model is stated above this contains only two parameters. Thus unrestricted model is given by

yi = β0 + β1xt + β2D + β3Dxt

4.7 Analysis

Initially using the autocorrelation and partial autocorrelation, the analysis on milk production data was carried out. This would help in interpreting the relationships between the farm input and the correspondingly its production output. Autocorrelation is extent of correlation between a time series data of frequent measurement during a fixed period of time.

While the partial correlation is the correlation between two random variables or residuals which further develops linear regression. Initially the mean of frequency of production yield was measured in order to find out the stationary condition in the particular interval of time using autocorrelation and partial correlation. In order to maintain the stationary condition, the differences of the consecutive production yield till 2008 was measured.

These results of the stationary data by using autocorrelation and partial correlation were used for estimating the linear model which will give the correlation between consecutive data .Two Steps were carried out to perform autocorrelation which mainly consist of individual series further the mean (y), variance (v), covariance(c) and autocorrelations (a) were measured for every year from year 1997 till 2008 of total production yield in the quota period in each series. Thus firstly the average yield per cow is analyzed for each year and the graph is shown below.

The series which estimated the total yield estimated by using the differences in covariance for the particular time period is as follows

The significance was tested which was suppose to be greater than 0.5 and then the autocorrelation was considered as significant. Further the factors for estimating the overall yield was tested which gave the differences in various mean parameters in that time period.

Steps for Chow test:-

  • Firstly the sum of squares for the restricted model (SSER) should be noted. This refers to the sample regression in which slope coefficients are viewed as equal in all the observations.
  • Further note the sum of squares from each of the subsample regression results (SSE1 and SSE2). Add these two values to form the sum of squares for the unrestricted model (SSEUR).
  • Values are T1 and T2 (number of observations in each subsample), and k (the number of restrictions to be tested, in this case the number of estimated parameters in the subsample regressions). Some important terms used in test are as follows
  • SSEr -Estimated sum of squared errors for the restricted model
  • SSEur-Estimated sum of squared errors for the unrestricted model
  • T -Number of observations
  • J – Number of restrictions on the restricted model
  • K -Number of parameters on the unrestricted model

Now calculate the test statistic:

F = (SSER – SSEU)/ J


  • Perform an F test for equality of the coefficients across subsamples. If calculated F value exceeds the critical value in the table then reject pooling. That is, treatment of the data as two different subsamples is more appropriate than assuming that the same model parameters apply equally to both groups.

The data set consisted of 13 observations. Column B which is size of the herd for the time period between 1995 till 2008 was labelled as Y and column C which was the total annual milk yield was labelled as X. These data was then divided 13 observations into two parts by assigning a dummy variable D=1 for the first 6 observations and 0 for the last 6 in column D. in the column E, Then further multiplied the different values of the independent variable X with the dummy variable, using the formula C2*D2, and copying it down. Thus including an intercept dummy variable and a slope dummy variable, hence constructed an unrestricted model.

The least square estimation of this model gave the values of the unrestricted sum of squared errors, SSEU=8025.671.

For the restricted model, Y was used as the input range and X as the output range. This gave the value of restricted sum of squared errors SSER=24276.0721

Hypothesis was used for the Chow Test:

Hypothesis1: H0: β2 =β3 = 0

Hypothesis 2: H1: β2≠0 or β3≠0

The estimated restricted model is as follows. The t values are given with parentheses.

(0.355498) (3.5682)


(-0.63163) (4.401379) (1.59978) (-2.75888)


The x variable is significant in both models. However, the dummy variables are individually not significant. But, the F-test is calculated as,

The F-statistic is = 5.638488309. And the Right-Tailed critical value is =3.259446306

In this case, the F-statistic is greater than the Right-Tailed critical value and the decision taken is to ‘Reject Ho’. Therefore the β2 and β3 are jointly significant although individual t tests showed that they are not significant individually.

5.4 Results

After performing the Chow test the values of b2 and b3 are not equal to zero and therefore significant. This implies that, the two data sets cannot be pooled and the regression coefficients for the first half of the sample are significantly different from the second half of the sample.

Chapter 5

Research Discussion

5.1 Reasons for increase in milk production prices in UK

  • Choice of feedstuffs for milk production is decided by CAP which increases the milk prices received through production quotas, intervention storage and levies on import.
  • UK milk support prices have increased due to fluctuation in exchange rates.
  • In addition, the cost of gaining high milk yields through greater concentrate use is also affected by the cost of leasing quota for production over a farm’s designated quota amount

5.2 Reasons for inadequate supply for milk in UK

The major issue is the dairy market is inadequate supply of milk and milk products in the market. Thus the main reason for inadequate supply of fresh milk is due to concern about the bovine tuberculosis bacteria found in the milk of animals. This led to slaughtering of 28,000 animals last year and it is predicted that it would increase this year also. The National Farmers Union (NFU) for England and Wales estimated that TB reduces milk output by 300 million litres per year and it is estimated to cost the British taxpayer and staggering £100 million annually.

Source: RPA, 2007

The other issue is the increased cost of the dairy products which has affected the supply chain. The major pressure is onto the Farmers and milk products manufacturing companies. Thus the performance of supply chain has been affected in all areas of production as well as the packaging and transport. The numbers of cows are decreasing due to weather along with terrible weather in summer 2007 which has affected the milk production and has fallen at the lowest in last 30 years. The input cost of production had increased during 2007 which led to increase in the milk prices.

The market analysis suggests that the import demand and prices for cheese and butter would increase. Export demand for milk products will lower if export subsidies will decrease. The CAP reform on the demand of milk products will have a reduced impact on the products prices due to intervention prices which would further lower the butter production.

Average value of dairy exports and imports for the period 2000 – 2002

Source: National Department of Agriculture

Next other issue in milk supply chain is that there is sudden increase in seasonality’s of milk production which has increased the processing costs as well as has hampered the innovation process. This situation has led to increase in demand of milk and milk products. Customers have also become more health conscious which has led to increasing demand for healthy innovative milk products. Thus many manufacturing companies have undertaken multi milk product plant in order to balance the demands and supply of different dairy products.

Dairy sector will be one of the marketing oriented sectors. Most of the milk which is produced is used for consumption in form of milk and milk products. Increase in demand of milk is considered to be important factor for rising in farmer’s revenue as well as the price sensitivity depends on the milk demanded. For example, the study of the Consortium INRA-Wageningen (2002) on dairy policy scenarios has shown that “if the demand growth rate is 0.5% a year rather than 0.75% a year (as has been observed in the past), ten years later, the farm milk price is 5 to 7% lower and the producer surplus is decreased by 2 billion”.

5.3 Factors affecting consumer demand for milk and milk product

There are several economic factors affecting the demand of milk and milk products but the most important once are the cost of the dairy products and income of the people have important impact on milk products demand.

Cost of the product: If an increase or decrease in price is considered then the 1% change in the cost for dairy products per sewould be expected to result in a 0.3% change in demand as suggested by defra, 2007. Thus this price changes according to the dairy product. Thus if demand for cheese is considered, its demand changes according to the price change. Thus the cost of the product changes according to the supply of the other substitutes available in the market.

Income: In high income countries, consumption of dairy product is high thus food demand is more in UK. When the amount of income spend on food decreases when the income of family increases while the amount of money spent on other luxury items rises. Higher income will lead to increase in shifting of consumption pattern from the lower priced food product to higher value product.

There are other minor factors which can be either demographic or socio economic factors which also affect the demand for the milk products like age, household size, food preference attitudes and awareness for nutritional foods.

5.4 Future developments in dairy supply chain

The future of the dairy industry is going to be very different than what it is now. There are various factors on which the dairy supply chain will depend in future due to new developments and changes happening around the world as well as the technology used in research of milk products. The factors are as follows

New agricultural reforms

Common agricultural policies reforms have estimated that their will be limited supply of milk from 2015 which will put a lot of pressure on farmers all over EU.Due to the reduction in dairy supply in future their will be competition and pressure faced by the farmers so their will be other ways to cut the production costs. Their will also be losses in export subsidies which will cause reduction in fats and cream production.

The other forecast are that prospect cattle sizes in UK will increase from 300-1000 .UK has the future to be world leader in production of milk and milk products which was forecasted by Milk road map, 2008.In future if Market stabilizes there would be much increase in the production levels. The British dairy industry could potentially be playing beyond its current capacity as predicted by Milk road map, 2008.

Production cost

Milk production has become quite expensive because of rising feed prices and maintenance cost of the cows. Thus it will indirectly increase the labour cost and due to more problems of getting into more seasonal production it would lead to shortage in milk supply. Thus more and more feed will be required for animals in order to have adequate milk production .To increase the grasslands to produce feed for cows, their should use of fertilizers which would add to the production costs. Mostly likely the feeds are imported of good quality to get appropriate output. Transportation cost and manufacturing cost may also be affected due to seasonal pattern of milk delivery and production. Thus the cost of milk and milk production will be higher in future as it would lead to higher use of more efficient systems which will less time consuming and gives higher productivity.

Functions of retailers and suppliers on dairy supply chain

Retailers are interested in getting into every stage supply chain starting from farm level operations to the retailing stage. Supply chain relationships in UK have been predominantly established between the retailers, suppliers and the consumers. It is predicted that this apparent relationship between retailer and supplier will reinforce in the potential prospects, understanding better consumer demands and expectations to facilitate better interaction with the farmer, with which they can then modify their product and administration process for a higher price and to make them more efficient.

There are lots of differences between the retailers and suppliers on deciding the prices. At farm level, there is lot of competition between the farmers as they act as price takers from the supplier as they sell same particular product hence they are always in compressed situation.

During the autumn, the milk production is decreased which leads to different demand for different types of milk and milk products. Thus the consumption of various dairy products may vary depending upon the specific segment. According to MPO sources 85% of raw milk is bought on the basis of milk content and 15% is bought on a volume basis (MPO, 2003).

Globalization of dairy marketplace

Milk Roadmap, 2008 have implied that “there will be further rationalization of dairy processing businesses, so that there are greater economies of scale and secure market presence in the key global markets with increasingly global retailers. Furthermore, global economic and population growth will grow demand for dairy products and in turn production. The UK dairy sector can act as a global sustainability leader through the actions contained in the Milk Roadmap.”

Further research in dairy sector

Increasing pressure in dairy sector has brought about research and development in UK dairy supply chain to make it more efficient. The important aspect of carrying out a research is funding and support which is required for the farm sector which would enable the use of technologies and expertise in milk processing and production. Lots of projects should be sponsored by the government for researching for development and other practices.

Chapter 6 – Summary, Conclusion and Recommendations

6.1 Introduction

This chapter presents a summary of the research procedures and findings of the study. It also presents the conclusion and recommendations.

6.2 Summary of the study

The study investigated the facts about global food supply chain industry and the various issues which take place in supply chain. It also gave us the overall view of global food supply chain as well as the need for redesigning the supply chain. The literature review was based upon the primary characteristics of the food markets, factors of supply chain which affects the consumers and the ways in which strategic improvements can be done for effective supply chain.

Food industry is vast and each food product has its own supply chain which makes it more complex to address the issues in each supply chain. Thus this study was then converged to dairy sector in UK. The study was a descriptive and was aimed at understanding the production of milk and milk products like butter, cheese, cream and then the demand for this production was correlated with daily milk consumption pattern in UK dairy industry.

The data was collected from DEFRA statistics which was related to annual milk production from the period between 1997- 2008.Multiple Linear Regression, Descriptive analysis, correlation analysis and Chow test was performed on the data.

6.3 Summary of Research findings

This section discusses the results of the present study along with the findings of the previous research done.

6.4 Conclusions

Following conclusion was drawn from the global food supply chain and dairy supply chain study:

  • Globalization in the food industry has completely transformed the supply chain as well as logistics of every food product. Food supply chains have become more complex as it depends on various factors like urbanization, socio-economic factor, marketing etc.Thus the overall supply chain industry is undergoing more changes and companies are developing innovative strategies in order to enter the global food market.
  • The study has found that UK dairy sector has become more stabilized and more importance should be given to the production inputs. Deregulation in dairy industry has led to decrease milk production which has caused due to farmers which already left the industry. Quota system has various inefficiencies which affect the milk production as well as it affects the imports and export prices by developing various reforms on every detail of production.
  • Milk products like butter was flooded in the market due to new CAP reforms which led to decrease in price for butter and skimmed milk powder. There have always been changes in liquid milk production due to seasonality which leads to gradual increase in the prices of liquid milk.
  • UK milk prices were lower than EU prices. There are tender systems in between milk suppliers and retailers which lead to uncertainty in passing of the tender and contract bidding is performed.
  • Retailers and suppliers are gaining the same profit since 2005 due to stability in milk production. Farmers are gaining some sustainable profits even if the production costs have increased due to single farm payments schemes.

6.5 Recommendations

  • Although production and supply of food products to the market is important at that particular time, the market information and consumer demands should also be known in order to have efficient and well organized supply chain. Thus it is highly recommended that market research, development of new technologies as well as trying to enter the global market can give lot of exposure and improve the performance of supply chain by inventing new markets. It is also recommended that examining the current market trends and studying the consumer consumption pattern may help in future innovations.
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