Thursday 8 October 2015

Dairy Industry Crisis: Technical Solutions

 The European dairy industry is suffering a deep crisis during the last months due to the low prices of sales, under the production costs.

 According to the European Commission, the crisis has been driven by Russia's trade ban on Community food industry, added a demanding fall of milky products in China P.R. and other BRICS countries to a lesser extent, and a slight increase of the world production especially emphasizing Australia (2.5 %), USA (1.6 %), New Zealand, world's largest producer, (0.9 %) y the European Union (0.8 %).

 Summarizing, there has been a temporary drop in demand that joined a slight increase in production.

 The practical impact is the milk price is between 15 % and 35 % (depends on the EU area) under a price to give profitability enough to the producers.

What solutions can be applied?

 Both, the dairy producer associations and European Union governments propose the following measures:
  • Setting minimum retail prices.
  • Re-introduction of production quotas.
  • Financial grant, to compensate for the drop in profitability. 
  • Encourage innovation and develop new dairy products, to consume milk production.
  • Creation of new cooperatives and associations, to apply economy of scale.
 Innovation and development of new dairy products are an excellent solution, it must be carried out at all times, but due to its high risk, high cost and high period of phasing, it doesn´t look the best short-term solution.

 Creation of cooperatives and associations will reduce costs and increase efficiencies, but supposes a short-time staff reduction by duplicities elimination.

 Regarding setting prices, re-introduction of quotas and financial grants, they don't suppose an improvement of producer's productivity, so the producers will be grants dependant and will lose market share.

An engineering solution.

 We can define productivity as a ratio of outputs (milk production) and inputs (resources needed for the production).

Productivity = Actual Outputs / Actual Inputs

 Let's analyze each term.

Actual Outputs: It's the result to multiplying production Capacity, Availability of the process (ratio of gross operating time and available production time), Performance of the process (ratio of net operating time and gross operating time), and Quality of the process (ratio of valuable operating time and net operating time).

In accordance with Lean Manufacturing methodology, the result of multiplying Availability, Performance, and Quality is defined as Overall Equipment Effectiveness (OEE):

Actual Outputs = Capacity * OEE

Actual Inputs: It's the result of the addition of human resources and physical resources; physical resources are the addition of Acquisition Costs, Operation Costs, Maintenance Costs, and Disposal Costs.

Resources = Human Resources + Acquisition Costs + Operation Costs + Maintenance Costs + Disposal Costs

 Therefore, to improve productivity is possible by the OEE increase, Acquisition, Operation, Maintenance and Disposal Costs; without increase the Capacity or reduce Labor Force Costs.

 To implant Lean policies, as Value Stream Mapping and pull system to eliminate wastes, to increase availability by Kanban and reduce human errors by Poka-Yoke allow increasing dramatically the real production without big capital investments.

 On the other hand, to implant a Physical Asset Management plan allows the physical resources optimization by implanting specific measures as Reliability Assurance programs and Reliability Centered Maintenance (RCM), taking into consideration the implantation risk.

 A sustainable solution.

 The implantation of both Lean and Physical Asset Management results in a quick rise of productivity, without the need for a large investment, without reducing the labor force, and controlling the risk associated.

 It provides a sustainable solution because it is focused on reducing costs; consequently, it increases competitiveness, at the same time increases production, and allows to rise of the market share and business profitability, releasing resources that may dedicate themselves to research, development, and innovation.

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