Low milk prices unearth the supply chain's dirty secrets

Farmers have been leading cows into supermarkets and emptying shelves in the dairy aisle, to protest against the dropping price of milk.

The price of milk has fallen 25% over the past year, with the average cost now 24p per litre. Lower prices reduce profits, make it harder for suppliers to recoup their costs and ultimately put people out of business. In particular, it has tended to be the smaller farmers in more remote areas, who face higher production and logistics costs, that have suffered from the drop.

Responsible retailers have formed dairy development groups to support farmers and enhance the efficiency and sustainability of the production process. They guarantee a price for milk, based on the cost of production. Unfortunately, not all retailers have adopted this approach.

Following talks between dairy farmers and supermarket chain Morrisons, the retailer has agreed to introduce a new brand of milk that costs an extra ten pence, which will then be passed on to farmers within milk cooperative Arla. Although this represents a small victory for the farmers, the dispute seems likely to continue, as the incident brings to light a host of issues to do with the way we manage supply and demand in the UK.

Secrets of the supply chain

At the heart of these issues is the supply chain: each link in the chain is a process, which takes a product one step further along the path from its source to the consumer. The costs of these processes, and the demands of the consumer, are critical to determining the price of the product, and the profit made by each of the businesses involved.

This is one of the rare occasions we are confronted with parts of the supply chain that are usually hidden to us. After all, it’s not every day we’re forced to think about who is raising the cows or bottling and shipping the milk we find on the supermarket shelves. Although many of us don’t understand them, supply chains have a dramatic impact on almost every aspect of our lives: from the supermarket, to the doctor’s surgery.

Understanding how they work, and thinking about them when we do our shopping, is crucial to helping businesses thrive.

Behind the scenes of the dairy supply chain.Caffeinehit/Flickr, CC BY-NC

Let’s start with the supermarket. For the dairy industry, the problem starts with low prices. But more broadly speaking, this is not the only issue. The promotions to which many of us are drawn when shopping appear to offer good value in the short term. But “buy one, get one free” and other such offers not only undermine the prices of the food, but are also a root cause of inefficiency.

They create spikes in demand – wherein shoppers who want two items instead of one, exhausting supermarket stocks more quickly, and putting increased pressure on the supply chain. These offers also mean that we stockpile excess products at home, rather than just buying them when we need them. And when we don’t consume those products before their expiry date, we create unnecessary waste.

The fact is, we in the UK throw away 7m tonnes of waste per year; 50% of this is comes from our homes and more than half of that is food we could have eaten. This shows that we are poor at balancing supply and demand within the household. We could save £480 per year by getting better at the basics of supply chain management.

Probably a waste of a melon.Melon promotion image from www.shutterstock.com

And by better balancing what we eat against what we buy, we could reduce unnecessary waste – and its impact on the environment. Indeed, the benefit to the planet would be the equivalent of taking one in four cars off the road.

Life savers

Private businesses aren’t the only ones that suffer when the supply chain goes wrong. As it recovers from the economic downturn, the UK is still working toward balancing the books and reducing the deficit. Public services are coming under pressure, as they are required to do more with less. This is posing new challenges to the provision of some of our most essential services: namely health, welfare and education.

The NHS is under particular pressure, as it deals with an ageing population, and an increase in chronic illnesses such as Type 2 diabetes. The organisation is underpinned by a complex web of supply chains; from the visible provision of health care, to the building and maintenance of hospitals and surgeries, cleaning services, food preparation, waste disposal, parking, training, counselling, administration, and information technology infrastructure, to name but a few.

Part of the public service supply chain.Hospital cleaner image from www.shutterstock.com

The NHS directly employs more than 1.3m people, 70% of whom are women – approximately one in 23 of the working population. They, in turn, are in contact with more than 1.5m families every day. This is just the visible part. For every job on the front line, there are approximately ten in the layers below. This suggests that the NHS involves over 10.5m people, working together to help frontline staff in keeping our nation fit and healthy.

Supply chains matter: they are everywhere. They touch every aspect of our lives – indeed, some might say our lives depend on them. The basic balancing of supply and demand is something that we deal with every day in our homes, in our industries and in our public services.

Yet there is still a fundamental lack of understanding about them: to address this, we are currently running an interactive research programme to help explain the significance of supply chains. Given the social, economic and environmental challenges we face as a nation, we need be more creative with less. It is time for everyone to understand their agency within the many supply chains they are a part of.

Janet Godsell is affiliated with the European Operations Management Association (EurOMA) Board, the Institution of Mechanical Engineers, the Manufacturing Industries Division Board, the Department for Business, Innovation & Skills and the Manufacturing Advisory Group.

Ruth Leary does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.