{"id":1612,"date":"2015-12-06T03:42:17","date_gmt":"2015-12-06T08:42:17","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/vietnam-dairy-products-joint-stock-company-milk-for-everyone\/"},"modified":"2015-12-12T13:13:09","modified_gmt":"2015-12-12T18:13:09","slug":"vietnam-dairy-products-joint-stock-company-milk-for-everyone","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/vietnam-dairy-products-joint-stock-company-milk-for-everyone\/","title":{"rendered":"Vietnam Dairy Products Joint Stock Company: Milk for everyone"},"content":{"rendered":"

Company Introduction<\/u><\/strong><\/p>\n

Vietnam Dairy Products Joint Stock Company (VDP) is the leading dairy products manufacturer in Vietnam. Dairy products account for over 95% of VDP\u2019s revenue. Today, VDP holds 53% of market share in liquid milk, 84% in yogurt, 80% in condensed milk, and 18% in powder milk segment in Vietnam.<\/p>\n

VDP is a highly effective companies at driving alignment between its business and operating models.<\/p>\n

\"Plant\"<\/a><\/p>\n

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Business Model<\/u><\/strong><\/p>\n

VDP creates value by producing high nutritional and cost competitive dairy products, and captures value by utilizing VDP\u2019s broaden distribution network to deliver the perishable products quickly to customers, especially for children who need high nutrition for their growth.<\/p>\n

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Operating Model<\/u><\/strong><\/p>\n

VDP has three main processes that transform its assets into valuable actions to support its business model and competitiveness: procurement of raw materials, production, and distribution.<\/p>\n

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Procurement of Raw Materials<\/u><\/p>\n

The main raw material of dairy product is fresh and powder milk and its securement is vital for the operation. Lack of milk supply is the bottleneck of the manufacturing process. Moreover, since fresh milk is perishable, timely procurement is critical.<\/p>\n

VDP utilizes three milk sources to realize secure and optimal procurement: in-house cow farms, import from an international market, and local cattle farmers.<\/p>\n

First, VDP owns 46,000 milk cows in its 9 cow farms which serves 40% of the milk supply. Although it requires moderate capital expenditure, in-house cow farming serves as the stable material source of VDP.<\/p>\n

Second, importing powder milk from Australia or New Zealand is another supply source. Powder milk is one of the main raw materials for yogurts and milk related beverages such as cocoa. However, international milk market is highly volatile and it affects the product cost while it is difficult to pass on the cost to the consumers due to its nature of basic goods. Hence, VDP is incentivized to diverse its milk supply resources other than importing (See Figure 1).<\/p>\n

Figure 1: New Zealand Fonterra skim milk powder ultra-high treatment price (USD\/MT)<\/p>\n

\"price<\/a><\/p>\n

Source: JP Morgan<\/p>\n

Finally, VDP procures the rest of fresh milk supply from local cattle farmers. In Vietnam, many farmers crop rice but cattle farming is more profitable even though it requires upfront capital investment to purchase cows. VDP provides financing, training support, and fertilization and fodder for cows to help smooth transition of farmers from rice cropping to cattle farming. VDP and cattle farmers sign contracts but VDP usually retains flexibility of the purchase volume. Hence, VDP secures flexible milk supply while not incurring excessive assets in its balance sheet.<\/p>\n

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Production<\/u><\/p>\n

In Vietnam, disposable income per household varies significantly and it is important to provide a wide range of products so that the household can afford to purchase the dairy products, or VDP can change the perception of the customers that the products are affordable. Also, the consumption volume differs according to the growth stage of the child. Moreover, usually consumers have their preference on the types and taste of milk and yogurt: pasteurized and ultra-heat treatment sterilized milk, and flavor of yogurt etc. To address those issues, VDP procures the latest production machines from Swedish Tetra Pak, realizing automated filling and packaging for several different types of volume and flavors in one line. Furthermore, VDP sets up milk collection points and delivers collected milk directly to VDP\u2019s factory. VDP connects a tank of milk collection vehicle and the Tetra machines directly to reduce setup time and throughput time, and to avoid infection by exposing to air and increase quality control efficiency.<\/p>\n

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Distribution<\/u><\/p>\n

In order to execute and support VDP\u2019s business model, the provision of high nutritional and cost competitive dairy products to consumers, short delivery from production facility to customers is important to maintain the high nutrition and quality of the products. Also, the majority of customer reach point is small individual retailers with limited shelf space. To address the delivery time, penetration to the individual retailers, and delivery frequency to refill the shell space, in addition to its direct salesforces who deal with more than 600 supermarkets, VDP utilizes 266 exclusive distributors to serve its 224,000 retail points, backed up by VDP\u2019s advanced enterprises resource planning IT system developed by Oracle.<\/p>\n

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Overall, these unique features of the operating model not only serve to realize the core value of the business model but also contribute to VDP\u2019s constant revenue growth while maintaining high profitability in the low profitable dairy products industry (See Figure 2).<\/p>\n

Figure 2: Historical revenue and profitability trend of VDP (VDN bn)<\/p>\n

\"performance\"<\/a><\/p>\n

Source: JP Morgan<\/p>\n

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Reference:<\/p>\n