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Figure 1. Framework for risks analysis in milk supply chain |
| Livestock Research for Rural Development 27 (7) 2015 | Guide for preparation of papers | LRRD Newsletter | Citation of this paper |
Agricultural production is actually a risky business. Risks exist in every stage of production carried out by each of the actors along the production chain. This implies that the success of improving the performance of the agricultural business will mostly rely on the actors’ ability to manage risks. This paper reports the results of an exploratory study on the risks that the milk supply chain in Indonesia faces. The focus is to identify the sources of risks that may appear in the existing milk supply chain and their implication on production behavior of the chain. Informal interviews and focus group discussion were conducted with farmers, farmer’s organizations, and dairy manufacturers in a milk-producing area in West Java Indonesia.
These reveal some early findings concerning the sources of risks in the milk supply chain, and the likely consequences for the actors of the upstream and downstream segments. Finally, it preliminary concludes that extensive risk management practices are crucial for the entire milk supply chain.
Key words: cooperatives, farmers, manufacturer, risk-manifestation
Research has extensively studied agricultural risks since the early birth of the modern agricultural sector. In this era, risks are the main concern of society, scholars and policy makers as these risks are often associated with adversities and losses borne by agricultural firms and their survival as a business. It is also because of rural family-farms, instead of firms, which initially dominated agricultural production, that most risk studies put more emphasis on the survivability of businesses that provide the main source of income and welfare for rural community. However, it is believed that our understanding of risk management in the context of the recent agricultural business is still limited. The major reason is that agricultural risks and their management – in most studies – are still placed solely in the perspective of individual entity (i.e. individual farmers or farm managers or firms). It is believed that this may not become relevant any further and has to be shifted into a broader perspective since the production of agricultural products (agro-products) recently is about “farm to fork” or “grass to glass” businesses that form a supply chain which comprises a set of collective entities that perform a wide range of activities and processes.
An agricultural supply chain typically involves a huge number of actors from spatially-dispersed places, where raw food materials will flow from farm-household producers in rural areas into large-modern food processors, retailers and markets in urban area. Van der Vorst, Silva and Trienekens (2007) highlight the important features that differentiate the agricultural supply chain from the other chains. In the upstream segment, farmers or producers usually deal with a long-production cycle, seasonality, and variability of products, while in the downstream segment, high variability on quality and quantity of the farm product supply is a common situation that processors or retailers have to deal with. In addition, the poor conditions of transportation and storage, requirement of specialized and high technology machinery, the regulations and legislation regarding consumers and environment, product safety and traceability become the major issues surrounding this agricultural business. These features indicate that the agricultural supply chain is highly vulnerable to risks.
Milk is one of the important agro-products in Indonesia. Based on the supply perspective, there are a great number of farmers who still rely on milk-producing activities for their livelihood. In the demand side, an ever-increasing level of import on milk-related products can be an indication for the constant growth of domestic milk consumption. However, it has been proved that the performance of the milk supply chain in Indonesia is still very low as indicated by the declining trend of domestic production (DGLAH 2011). Among several reasons, risks are considered to have a close correlation with this condition. Having similar characteristics with other agricultural production chains, the milk supply chain involves many actors along the chain, including traditional farmers, providers of farm inputs, producer organizations or cooperatives, processors and manufacturers of milk products, and retailers. Every actor applies different production processes and so do the risks associated with such processes. Overall, supply chain risks are an inevitably important factor related to the performance of the entire chain.
This study aims primarily to identify risks that may exist within the milk supply chain, or which the actors along the chain face. Risk identification is the initial stage in establishing risk management in any supply chains. It is also our intention to capture the manifestation of risks among the chain’s actors and their likely impact on the production behavior. We will call these phenomena “the risk chain”. For these purposes, this paper will be organized as follows. After the introduction, we will review the extant literature on supply chain risks – specifically on risk identification – to establish the conceptual framework underlying this study. It is then followed by the research methodology. The description of the actual situation of the milk supply chain in the area under investigation is then presented, and finally, the rest of the paper will be devoted to discuss the findings and conclusions of the present study.
There are many definitions of risks in the literature. Debertin (1986) simply defines risks and uncertainties as the probability for an event to occur. The main difference between the two is on the probability. Risks refer to a known probability for the occurrence of an event, while the probability for uncertainties is unknown. Then, the resulting implication of a risk is a choice (Khan and Burnes 2007). In the agriculture setting, risks are usually defined as uncertainties that “matter” for producers, and may involve the probability of losing money or welfare (Holton 2004). There is strong evidence showing that most agricultural producers – especially traditional farmers – are typically risk-averse. When they, as decision makers, are risk-averse, they prefer to give up some resources, or potential gained outcome, to protect themselves from future events that may cause them to lose a significant amount of income. For example, a farmer does not seems to put on an investment on commercial inputs (i.e. buying high quality expensive fertilizer) that can secure his high level of output when there is no information about the market price at the harvest time. On the other word, farmers prefer lower yields rather than having to sacrifice their economic resources in the presence of market risks. Thus, holding the risk-aversion character for most agro-producers, we can conclude that in the presence of risks, the outcome of agricultural production tends to be sub-optimal.
In the supply chain context, risks encounter the flow of products, funds and information from producers’ producers toward consumers’ consumers (Colicchia and Strozzi 2012). This suggests that risks may appear in every stage and production process of a supply chain, especially producing and distributing products, transferring funds, and channeling information. Juttner et al. (2003) defines supply chain risks as “the variation in the distribution of possible supply chain outcomes, their likelihood, and their subjective values”, while Tummala and Schoenherr (2011) define these risks as “the events that adversely affect supply chain operations, and hence their desired output”. Similarly, Ghadge, Dani and Kalawsky (2012) suggest that supply chain risks are “an exposure to an event that causes disruption thus affecting the efficient management of the entire supply chain network”. These definitions imply that the risks faced by one actor may be part or comprise the risks faced by the other actors in the supply chain. This in turn will affect not only the outcome of one single actor but also all the actors in the chain as a whole. For example, any risks faced by farmers in the upstream segment may be part of the risks faced by actors in the downstream segment, such as processors or retailers, and vice versa. Thus, risks may play a considerable role in a supply chain in a way that will determine its outcomes.
Early agricultural literature puts more emphasis on addressing sources of risks. Risks faced by a single farm are typically arising from weather or nature-related risks, biological and environmental risks, farm management and operations, market-related risks, as well as policy and institutional risks (Jaffe, Siegel and Andrews 2010). Meuwissen, Huirne and Hardaker (2001) consider 22 sources of risks in livestock farming operations in Netherland. In general, prices (meat and milk prices) and production/ farm operations are important sources of farm risks. Akcaoz and Ozkan (2005) find at least 26 sources of risks faced by dairy farms in Turkey. In order of importance, they are environmental risks, price risks, catastrophes, input costs, production and technological risks, political risks, financial risks and family (human risks). More recently, Zhou, Nanseki and Takeuchi (2012) reveal 19 sources of risks that are relevant to dairy farmers in Inner Mongolia and Herbei of China. Thus in general, milk price variability, animal diseases (e.g. foot and mouth disease and mastitis), and feed price variability are the biggest risks perceived by farmers.
In contrast with farm risks, the sources of risks in the supply chain – mostly in non-agrofood manufacturers – are more diverse. Juttner (2005) and Leat and Revoredo-Giha (2013) simply divides risk sources into supply risks, demand risks, environmental risks, as well as process and control risks. Tang (2006) suggests two types of risks in a supply chain, which include operation risks and disruption risks. The former arise from uncertainties in demand, supply and cost factors, while the latter arrive from natural disasters, such as weather disruption, or human-related ones such as economic crises. Rao and Goldsby (2009) who have developed the risk typology model argue that risks can emerge from environmental factors; industrial factors; organizational factors; problem-specific factors; and decision-makers factors; where each factor subsequently has several more variables affecting itself. Olson and Wu (2010) add the categories of supply chain risks, namely external and internal risk categories. The external category includes nature, market and the political system, while the internal category includes firm capacity, internal operations and the information system. In addition, Tsai, Liao and Han (2008) categorize sources of risks into asset risks, competence risks, and relationship risks. They find that many companies put an emphasis most on asset risks and put relationship risks in a lower level of importance.
Based on the previous studies, the framework for identifying risks in the milk supply chain can be established. In the case of the milk supply chain, there are three main actors; (i) traditional farmers as the main milk producers who raise a small number of cows; (ii) cooperatives as farmers’ social organization which also serve as a marketing body for the raw milk produced by farmers; and (iii) manufacturers as privately-owned business entities which procure and process raw milk into dairy products (i.e. mostly bottled and powdered milk, etc.). However, although the milk supply chain includes many actors, we simplify the milk chain into the dyadic setting, suppliers and buyers. In this setting, suppliers of the milk supply chain include farmers and cooperatives, while the buyers are dairy manufacturers. This framework is presented in the following figure.
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Figure 1. Framework for risks analysis in milk supply chain |
In this framework, we argue that the role of risks in determining the output of the suppliers – mostly farmers – is significant for the outcome of the milk supply chain as a whole. McConnel and Dillon (1997) show that “whatever the sources, risks will manifest themselves as a set of possible outcomes across each of the alternatives each party may take in managing its business”. As can be seen in Figure 1, it is very possible that the output produced by the suppliers under risk circumstances becomes a source of risks for the buyers, which in turn will affect the buying behavior of the buyers. We call it as a “risk chain”. Thus, it is expected to observe these following points: (i) suppliers or producers of raw milk have to confront many risks, these risks will manifest themselves in the characteristics of their output; and (ii) buyers or focal companies will attempt to minimize the risks possibly generated by the input-purchasing activities engaged with their suppliers.
The main actors in the milk supply chain in Indonesia are milk producers (farmers), cooperatives and dairy manufacturers. Even though there are also other actors such as domestic input suppliers, global suppliers, final retailers who also have essential roles in this industry. Based on DGLAH (2011), over 100 thousand milk producers in Indonesia usually operate some of three to five heads of milk-cows per farmer. Until the last year, Indonesia had approximately 500 thousand heads of cows and successfully produced 930 thousand tons of raw milk per year. Having a lower economic of scale in the farm operations compared to other developing countries, it can be observed that the population of dairy cows is slightly decreasing overtime.
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Figure 2. The general structure of milk supply chain in Indonesia |
Cooperatives and manufacturers play a major role in the marketing channel for the milk produced by farmers. Until the last two year, there were at least 95 registered cooperatives, but it is believed that only a few of them are still in full operation (GKSI 2011). In general, almost all domestic farmers are a member of a cooperative in their respective area. Cooperatives are considered as an organization that has a strategic position in the milk supply chain. It plays a role as a single provider of farm inputs - essentially complementary feed – and the sole channel for distributing – or selling – milk produced by farmers to manufacturers.
All of the domestic raw milk is absorbed by dairy manufacturers as the main buyer in the milk supply chain. Although there are over 30 manufacturers in Indonesia, only the largest six of them absorb about 85 percent of the available raw milk (Morey 2011). In fact, the domestic raw milk supply cannot meet the manufacturers’ actual demand. As most manufacturers are a trans-national corporation, the lack of raw milk is then supplied by their affiliated overseas manufacturers in the form of WMP (whole milk powder). In relation to final consumers, the consumption of milk products has reached approximately 870 thousand tons per year. As for the final products, it can be observed that milk products are mostly in the form of powdered milk (enriched milk) and sweet condensed milk. There are no clear evidences to show how much fresh (raw) milk is consumed by the final consumers.
This is an exploratory study. The reason underlying the present study is that our research problem has not been clearly defined yet and thus allowing us to familiarize ourselves with the researchable problems. For our purpose, we observed a case in one of milk producing areas in Indonesia. This area is known as Pamulihan – Sumedang, an area in West Java Province, located 250 km away from Indonesia capital city, Jakarta. The area is also well known as one of the rapid urbanizing areas within the province.
Currently, there are approximately 8000 heads of dairy cows owned by 2500 traditional farmers (farm-household enterprises). They, the farmers, consolidate themselves into 18 groups according to their respective home block. To support those farmers’ operations, there is also a cooperative, namely KUD Tandangsari (hereinafter referred to as KUD), which provides basic services and marketing channels for the farmers. Based on the recent report, the average milk production in this area is nearly 100 tons per day.
We employed a variety of methods to collect the necessary data. In the supplier side, we conducted field visits and informal interviews with the farmers representing 11 of 18 farmer groups in August 2014. At the farmer level, the interviews were related to the most significant sources of risks perceived by the farmers among several alternative risk sources derived from Zhou, Nanseki and Takeuchi (2012). Based on this study, 22 sources of risks were given in the form of questions at first and then those farmers were asked to make a comparison and ranking based on their respective most worried risks and their likely consequences on milk production practices. Substantially, sources of risks are categorized into production risks, animal condition risks, personal risks as well as input and output market risks.
During this period, we also conducted more formal discussion with three chairpersons representing the top-level management of the KUD. In this segment, we focused on the risks faced by KUD that may be originated from farmers as KUD’s member, which can be mainly categorized as institutional risks. In relation to the buyer, there were actually several limitations that made direct interviews failed to conduct. Therefore, most information concerning buyer side was also obtained from the management of the KUD.
This section will provide basic description on supply chain operations in the selected study area. It includes an explanation of the core activities of the milk chain performed by every actor in the chain along with the distribution. The following figure illustrates a series of activities in the chain.
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Figure 3. Core activities in milk supply chain |
Farmers produce raw milk. Usually, the scale of milk farming operations is relatively low. Given its natural endowments and the availability of household resources, three to five cows are common in traditional milk farming operations. According to the record provided by KUD, the cow productivity is only 10 liters per day. It means that farmers who keep three producing-cows can produce around 30 liters of milk per day. It is considered to be relatively low compared with the other milk-producing areas in West Java. From the farmer’s point of view, thus, their current low production can be explained by their constrained access to good quality animals and feed throughout the year.
Raw milk produced by farmers is then collected by KUD. KUD provides basic infrastructure to carry out the collecting activities through “milk collection points” (MCPs) located around farmers’ home block. There are a total of seven MCPs in this study area. These MCPs enable farmers to deliver milk immediately after the cows are being milked twice a day. In MCPs, KUD will do several milk-quality tests to determine the quality of the milk delivered by farmers. These tests include the “test of milk solid-contents” and bacterial test (known as the “Total Plate Count test”). These tests serve as a basis for calculating the price that will be received by farmers. Handling and immediate delivering have to be done by farmers to avoid the deterioration of raw milk (known as spoilage). In an open area without cooling, milk will only sustain for three hours before it begins to decompose due to bacterial activities. Indeed, handling milk is a critical key as it has something to do with the price that the farmers will receive.
From all of MCPs, KUD then bulks the raw milk in the “cooling storage” owned by KUD. This unit will preserve the raw milk until its quantity reaches a certain level, and in the next day, the milk is transported to manufacturers using special vehicles. Currently, there are two manufacturers that absorb large shares of milk produced here, hence, they serve as a dedicated buyer. A small amount of milk is sold directly by KUD. Mostly, the local food retailers buy a small amount of pasteurized milk from KUD for being resold to final consumers. The flow of milk in the supply chain in the study area is illustrated in this following figure.
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Figure 4. The distribution of milk produced in study area |
Recently, manufacturers absorb almost all of the milk offered by KUD. There is no contractual relationship between these manufacturers and KUD. KUD delivers the milk to the manufacturers based on their own order. In their orders, manufacturers will not put a quota for the milk delivered, but some degrees of quality standards are applied. The possibility for the manufacturers to reject the milk from KUD will be related only to the milk quality. Based on the information from KUD, the milk from KUD only serves 10 percent of the total raw materials used by manufacturers. However, it is necessary for these manufacturers to have fresh raw milk from domestic farmers because most of the imported raw materials is in the form of powdered milk. For manufacturers to produce liquid products (i.e. bottled milk or milk in sachet packaging), fresh raw milk is very essential.
This section describes several sources of risks that, to some degree, may affect the operations of the milk supply chain. However, in discussing these risks, the main emphasis will be on the segment of suppliers, namely farmers and KUD. In addition, we only select a few most significant risks among many other risks revealed during the interviews.
The low quantity of milk production is a major problem in traditional milk farming. In this study area, it is found that the average quantity of milk production is as many as 10 liters per cow per day, although some farmers owning higher quality cows are able to produce about 15 to 18 liters per day. In this case, genetic factors can partially affect the quantity of the milk a cow can produce. Thus, cows with high quality genetic factors are indeed the most valuable input for milk farming. However, high quality cows are scarce nowadays because of the absence of a structured or formal input market. Recently, it is not common for farmers to raise heifers (young cow) on their own due to additional long-term production costs. By the time they have to replace their old cows, they will rely heavily on external sources – mainly from other farmers in different areas or from informal markets – to get the heifers.
This condition is considered as a source of risks in the milk production for two reasons. First, farmers have no future information about the availability of heifers – as replacement stocks – due to missing markets. There is a possibility that in a certain situation, the heifers will not be readily available. Even if they are readily available, the price often exceeds the farmers’ ability to pay. The second reason has something to do with the genetic quality. In the absence of formal markets, there will be no sufficient information on the heifers’ genetic quality. Based on our observation, we found that many farmers strove to keep “low-milk-producing” cows due to unfavorable genetic quality of the heifers bought in the past. This condition consequently constraints them to produce an economically acceptable quantity of raw milk.
Similar to the genetic quality, feed is also the most determining factor in milk production, both in terms of quantity and quality. Recently, the availability of feed remains a problem in milk farming. Due to seasonality, there will be abundant feed in the wet season and, on the contrary, feed shortages in the dry season afterward. The quantity and quality of milk produced by farmers correspond directly with this seasonal condition. When the feed is relatively available, the quantity of the milk produced tends to increase. However, the quality of the milk will not only be determined by the quantity of the available feed, but also by the quality of the feed itself. In short, even if the feed is available, the milk quality will remain low if the feed quality is poor. Based on our observation, the total solid (TS) content of milk produced by farmers is 10 to 11 percent on average. It is presumed that this low TS content may be resulted from the animals’ biological response to the low quality feed.
Actually, TS is the main criteria for manufacturers in procuring the raw milk from farmers and setting the milk price. If the level of TS is much lower than the specified level, then manufacturers can certainly reject the milk supplied by farmers (through KUD), whereas if it is still tolerable, the milk price will be adjusted relatively to the specified level of TS. As the level of milk production, both in terms of the quantity or quality, is mostly determined by feed availability (also in terms of feed quantity and quality), then there is a possibility that in a certain season lower milk quantity and quality will be experienced by farmers. Feed availability becomes one source of risks in the milk production chain mostly when this situation is failed to be anticipated.
Handling practices are another factor that determines the quality of milk, in term of its microbial load. Initially, milk produced by healthy cows is almost free of contaminants, but immediately after it has been exposed to open air, the contamination begins to occur. Although such microbes are not necessarily hazardous for human consumption, they actually damage the milk properties. Throughout the production chain, many activities and chances which allow milk to be contaminated. For example, farmers’ practices in handling the milk after it has been milked from cows, and when it is delivered from farmers’ place to the milk collection points (MCPs). It is also possible for the contamination to occur when the milk is being bulked in MCPs or in the cooling storage operated by KUD. Furthermore, the transporting practice performed by KUD when delivering the bulked milk from the cooling storage to manufacturers also has the same chance of being contaminated. Overall, due to poor hygienic infrastructure used for milk handling, mostly in the farmer segment, it is evident from the study area that the lower quality milk, to some degree, is determined by these practices.
In fact, the microbial contamination in raw milk also serves as a basis for the milk price set up by the manufacturers. Manufacturers run a microbial test (called “Total Plate Count”) every time the bulked milk is received from KUD. As a common standard, the milk’s TPC should not exceed 100 thousands cfu/ml. Thus, the higher the TPC of the milk delivered by KUD, the lower the price the manufacturers compensate. Milk contamination becomes another source of risks since it can occur anywhere along the production chain and it cannot be controlled only by one single individual chain actor.
Other than contamination, bulking practices performed by KUD are also likely to bring effects on the decreasing milk quality. Again, due to poor infrastructure for good handling practices, KUD has a limited capacity to handle various quality of milk produced by farmers. It is not surprising to have various quality of milk since KUD has to receive it from thousand farmers, and each farmer indeed employs various methods in producing milk. Thus, current bulking practices may lead to free-rider problems caused by mixing different milk qualities in one storage. Let us take a simple example. Supposed that one farmer is able to produce milk that contains 12 percent of TS. At the same time, another farmer produces milk that contains only 10 percent of TS. If KUD mixes these two different milk qualities, then we can be certain that the TS will simply be corrected to the level of 11 percent. For the first example, it means that the manufacturers will pay only for the particular percent of TS. Although KUD has set up price differentiation for each quality level of milk produced by farmers, but in fact, manufacturers will only pay for one single price based on the bulked milk received from KUD.
This situation can become the source of risks especially for KUD in running its operations. As it receives the average price for milk delivered to manufacturers, some farmers who can produce milk with higher quality than the average one have to be paid at a higher price based on their milk quality. In this case, KUD must incur additional expenditure. In addition, milk-bulking practices can also lead to distrust among farmers since better quality milk should “subsidize” the poor one.
To deliver high perishable products that are very sensitive to contamination and temperature changes, KUD indeed requires special equipment such as vehicles equipped with a cooling system. Although KUD rarely experiences problems in delivering milk to manufacturers, a small probability of failure on the transport-related equipment or machines always exists. Based on our interviews with KUD, it is revealed that it had experienced at least two cases of transport failure. One of them took place in 2010 when the vehicle encountered damages in its cooling system while delivering 8000 liters of milk. It immediately caused the whole milk to deteriorate, and then rejected by manufacturers. This case have indeed burdened KUD for a considerable loss.
So far, the sources of risks that exist mostly in the upstream segment of the milk supply chain in the study area have been identified. The following table summarizes the sources of risks and their estimated impacts on milk production.
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Table 1: Identified sources of risk and its impact |
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Sources of risk |
Risk category |
Chain actors |
Estimated impact on milk production |
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Quality of animal |
Biological |
Farmers |
Quantity, quality |
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Availability of feed |
Natural |
Farmers |
Quantity, quality |
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Handling practices |
Operational |
Farmers, KUD |
Quality |
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Bulking practices |
Institutional |
KUD |
Quality |
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Transportation |
Operational |
KUD |
Quality |
It is obvious that upstream actors are certainly confronted with a great number of risks. Farmers, as the basic unit of milk production, have to deal with risks that are likely to be uncontrollable, i.e. the natural-type risks. These include the lack of good quality animals and the seasonal availability of feed. In addition, the degree of competition amongst economic activities in the study area is also considered as an emerging risk that the farmers has to face. Along with the increase of non-farm job opportunities in the agricultural area, farmers have experienced decreases in incentives to maintain their milk farm operations. In the end, this may cause farmers to close their milk farm and switch to non-agricultural businesses.
Risks that KUD has to deal with are mainly operational and institutional in nature. Until recently, KUD still has to make great efforts to heighten its operational performance. Given a large number of farmers to be served as member and thousand liters of raw milk per month to be handled, KUD has to perform in effective and efficient ways in order to minimize the risks threatening its operations in the chain. In relation to the institutional aspect, KUD has to maintain its relationship mostly with their dedicated buyer, i.e. manufacturers. Nowadays, milk manufacturers experience a higher level of competition in the final product market. Thus, to retain each market share, manufacturers seem to keep low the cost of raw materials they purchase. Unfortunately, given the unbalance bargaining power between the supplier and the buyer, this will not be advantageous for KUD and its farmer members.
Overall, with the presence of risks in the milk chain, the upstream segment will have two production outcomes, namely: (i) fluctuations in the milk quantity and (ii) variations in the milk quality. In our study, we argue that these outcomes are the results of the choices the farmers – also KUD – had made to minimize risk exposure. In other words, risks manifest themselves in those choices. For instance, the choices made by farmers such as to keep genetically inferior cows, not to purchase high quality feed, or to practice unhygienic milk handling, are the most feasible choices that available for them to minimize risks. For KUD, the choice to run the existing operations is also resulted from the efforts to minimize the exposure from its operational and institutional risk. Especially for the latter, having thousand farmers to be served, KUD surely also faces a very significant risk emerging from its patron-client relationship to be minimized.
Therefore, we argue that the outcomes of the upstream actors – fluctuations and variations in milk quantity and quality - become the main source of risks for the downstream actors, i.e. the manufacturers. Fluctuations and variations create a high degree of differentiation on raw milk materials procured by manufacturers, and indeed provide a direct source of risks. Assuming that manufacturers are risk-neutral, fluctuations and variations in terms of milk quantity or quality may directly affect the efficiency of the working assets owned by particular manufacturers. For instance, if at a time the quantity of the raw milk supplied by farmers declines, then the low level of procurement at manufacturers’ production plant may surely decreases the capacity utilization of the plant. This situation will substantially increases the costs of processing and may decrease the profit earned. This is also true that manufacturers have to deal with a high level of variations in terms of milk quality, which is the case most frequently found in the study area. Since milk is received everyday by manufacturers, this variation triggers additional treatment in the production process and thus the manufacturers may have to pay extra costs.
However, we are fully aware that the case is somewhat oversimplified. In reality, the manufacturers seem to confront more risks than just an input-related risk (for example, a declining service level) exposed by their partners in a particular supply chain. The logical flow in the case presented above is to show the essence of the risk chain, where risk manifestation on the upstream actors becomes a source of risks faced by the downstream actors. The following figure illustrates the risk chain in the milk supply chain.
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Figure 5. A risk chain in smallholder milk production |
In the context of the milk supply chain, the risks a manufacturer deals with mostly concern with the flow of raw materials from farmers and KUD, both in terms of quantity and quality. Since the flow of raw materials has great a possibility of disrupting production processes, and hence lessen the performance, thus, as a focal company, any instruments of supply chain risk management that effectively mitigate this type of risk should be applied by the manufacturer. Tang and Musa (2011) have proposed several basic mitigation methods for supplier-sourced risks, which in general are supplier selection, flexible sourcing, early supplier involvement and supply product monitoring. In fact, the latter method is the one that manufacturers still use to mitigate the risks related to the flow of materials. Based on the foregoing, the price of raw milk is determined mostly by manufacturers based on the quality of the milk. In this setting, pricing becomes an instrument for manufacturers to avoid risks, especially the risks attributed to the raw milk quality. However, we have not seen such instrument either to be effective in avoiding risks in the long term, or to be able to improve the quality of milk production practices in upstream actors. It is also unobserved on how a manufacturer should manage the risks arising from fluctuations in the quantity.
Although the ways in which supply chain risk management carried out by manufacturers have not been studied thoroughly, we argue that in the long term this so-called “risk chain” will receive the main emphasis. It is simply because most of the risks faced by manufacturers in the downstream segment of the supply chain are arising from the risk-minimizing behavior of the upstream actors. In our case, this risk-minimizing behavior will generate less desirable outcome for the entire chain (i.e. fluctuations and variations in the quantity and quality of raw milk). Thus, given the chain characteristics, milk manufacturers should adopt more a far-reaching approach to their supply chain risk management. This mostly includes the ways these manufacturers can effectively alter the production behavior of the upstream actors (traditional and smallholder farmers) in response to the emerging risks.
Based on these facts, some subsequent questions emerge, such as; (i) what motivates or limits these manufacturers to expand the scope of their risks management into the actors of the upstream segment (i.e. farmers); (ii) how can this supply chain risk management be implemented and organized within and across the chains; and (iii) how can a supply chain risk performance be measured?. These questions need to be addressed in the future studies.
These preliminary findings present the role of risks in the milk supply chain. Recently, most sources of risks for the entire chain arise from the upstream segment, mostly smallholder farmers. Actors in this segment confront many sources of risks such biological, natural, operational and institutional risks. Under the presence of these risks, these actors tend to pose risk-minimizing behavior in producing their products. This situation, in turn, is manifested itself in the sub-optimal level of upstream production which is reflected in the condition of the quantity and quality of raw milk produced. The risk chain in a particular supply chain emerges when the products of the upstream actors become a new source of risks for the downstream actors. Thus, in this case, it will be a prerequisite for manufacturers, as the final actors in the downstream segment, to practice in an extensive way managing such chain risks, mainly to secure their input supply.
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Received 10 April 2015; Accepted 15 May 2015; Published 2 July 2015
