Crisis Management

1. Sandra Kempers*, Berkel, The Netherlands
Yes, you can: actions during
the crisis
Challenges of the European dairy industry
dairy products or searched for EU25 market
Supply chain of the dairy industry
substitutes which triggered the As the european dairy industry is
demand for products made of plant one the most active partners of the
The supply chain of the dairy industry starts origin. world milk trade the development
with the milk farmers which deliver their The falling demand for dairy of european demand and prices
products to processors. Those produce all products met high production levels for milk was heavily effected by
kinds of milk and dairy products and either and led to increasing stocks. As a the one of global demand and
export or sell them to the retail trade. Only a consequence, prices started to prices (see figure 2).
small part is sold to the processing industry or drop mid 2008. Additionally the Higher domestic and international
wholesale purchasers. Consumed is the part of economic crisis has put further demand and thus rising prices
national production which is not exported as pressure on demand and thus Sandra Kempers triggered increased milk production
well as imported products (see figure 1). prices collapsed in 2009. in the European Union in 2007 and
at the beginning of 2008. However in response
Figure 1: to the higher prices home and abroad, demand
Supply for European products deteriorated again and
chain the rate of production growth was adjusted
accordingly, leaving the yearly output in
2008 nearly unchanged in comparison to the
one in 2007.
Example for price sensitivity
of consumers: shrinking demand in
Germany
With soaring consumer prices the consumption
of butter, yoghurt, quark and milk drinks has
decreased by up to eight per cent in the first
eight months of 2008.
Demand, production, price and Figure 2:
cost pressure Evolution
of average
World market milk prices
On the background of a booming world
economy and surging demand for dairy
products especially in countries such as
India and China global (farmgate) milk prices
have shown extraordinary rises in 2007. The
promising economic conditions have conse-
quently stimulated higher milk production in
particular in the United States and in South
America. At the same time the price peaks
filtered through the supply chain and caused
a dampening effect on private consumption.
Consumers either reduced their purchases of
* Sandra Kempers, consultant, specialized in performance
management for the food industry managing director at
StrategiCo (www.strategico.de)
I European Dairy Magazine 5/2009 (21. Jg.) I 21

2. declining raw material costs and decreasing
Figure 3:
costs for personnel offer potential for cost
Turnover in
the manufac- savings and thus add to efforts to improve
ture of dairy efficiency
products in Market share: on the production side a
the displayed reduction of overcapacity in form of a shakeout
countries takes place; as a consequence the remaining
make up 75 % market players are able to increase their
of total EU 27 market share.
production Volume: new products and new markets in
market
form of customer segments or geographical
areas (e. g. export markets) enable volume
growth .
On the cheese market, the growth market of
Figure 4:
dairy products of the last years, demand for
Exports
cheese fell by nearly 30 per cent, for special of dairy
brands like Edamer or Gouda even by nearly 40 products on
per cent. the world
Suffering from the recent developments on the market
milk market in general and from the financial
crisis in particular also european prices
reached record lows in 2009. In the attempt to
balance out the income losses connected
herewith lmilk farmers started to produce
higher milk volumes. Simultaneously retailers
succeeded in negotiating lower milk prices
in their negotiations with processors. Turnover development in the manufacturing of Acquisitions: purchases of companies or
Both factors added further pressure to the dairy products ¡ side information business units can be done at a fraction of the
price in an industry where costs such as Interestingly manufacturers of dairy products original value.
energy and food for cattle – to name only a few have not suffered from the slowing economy in Financing: for companies with a good credit
– are soaring. The result is an enormous 2003. Their turnover seems to be – lucky rating cheap loans are available which can be
squeeze on profit margin which ultimately enough – less independent on the economic used for investments into new production
asks for victims. cycle than one would expect (see figure 4). technology, expansion of research and
As this article is targeted to different parties of development for new products and for
the supply chain, the measures to be taken are strengthening their liquidity position.
formulated in a more general manner. Alignment in decision making facilitates
Turn
Interested parties are recommended to look at implementation of change: given the eco-
to 090
their individual situation and choose those nomic circumstances structural changes can
measures which they judge as being suitable easier be implemented as employees,
for their own needs. customers, shareholders and investors tend to
align their views and not only promote but even
Import/Export side information request change to secure their future .
Depending on the world-wide demand, the It is generally recommended to guard vital
availability of dairy products in and from other company resources to be ready for the upswing
continents and prices home and abroad, and to be able to profit from it: excellent
exports take place from the EU. employees, high quality products and services,
The ten most important trade partners of the EU a convincing marketing concept with a strong
(Victor Sanchez)
27 import more than 50 per cent of the amount sales organization as well as supportive and
of dairy products which leave EU territory. understanding banks provide the foundations
Destination countries for EU exports are mostly Crisis as an opportunity for the company to become and stay the first
Russia, Saudi Arabia, Switzerland, Nigeria, the choice after the crisis.
United States, Algeria, Japan, China, Egypt and Especially companies with a sound equity base
the United Arab Emirates. can profit from opportunities to further expand
Germany, The Netherlands and France are their market position and to sharpen their Measures to be taken during
those EU countries with the highest quantities competitive edge – for the time during and after the crisis
of cheese exported outside EU borders. The the crisis. Areas which offer extensive
Netherlands are record holder of butter exports opportunities are: Decreasing order income has lead to liquidity
and together with Denmark lead exports of Procurement: negotiations with suppliers problems in a number of companies. Very often
whole milk powder (see figure 3). about purchase prices and conditions, partly quick actions have been taken in order to tackle
22 I European Dairy Magazine 5/2009 (21. Jg.) I

3. this crisis situation. Measures like reduced Consequently measures to be taken are the discounts: especially in times of crisis
working hours, a hiring freeze, asking increase of liquidity through optimization of suppliers are easier to approach with this
personnel to use up accumulated overtime working capital by reducing costs and kind of requests as the competitive situation
hours and outstanding holidays or to even take increasing turnover, improvement of finances enables their customers to choose among
unpaid holidays, laying off temporary workers and increase of transparency and control. numerous alternatives
or even permanent staff asf. have helped fixing
– Adjustment of purchases based on reduced
the situation short-term. Moreover efforts were
sales expectations costs savings in
taken to improve corporate management and Working-capital-optimization production/operations: adjustment of the
company controlling. All this is important in
production based on lower sales
order to secure short-term liquidity and to cost savings in procurement mm, IT-S, CC-en -AZ
EDM, Format x /
increase transparency regarding the conditions – Negotiations with suppliers regarding – stocks and related stocking costs, material
of the working environment of the company. extension of payment terms and price costs and workforce planning to be adjusted
However, all these actions are short-term
measures which are not sufficient if the crisis
lasts on. Companies, which have to leave the
market first, are mostly those, which have failed
to keep costs in check with turnover growth
covering the cost deterioration in peak times of
the economic cycle. Moreover theiy have Life is liquid. ( )
missed out on doing their structural homework.
Apart from short-term actions, extensive
structural measures are therefore necessary in
order to secure survival. In praxis that means,
one should not only take isolated measures
derived from daily operations, which e. g.
generally would reduce costs by only a couple
of percentage points. Instead of this one should
go for significant changes, which would
achieve cost cuttings by up to 30 percentage
points.
The necessary measures should be defined in a
clear manner and be realized in time. Emphasis
Brainy metal
shall be put on the consideration of the
individual circumstances the company is
operating in and measures consequently
should be tailor-made to the individual
requirements. A detailed planning for dealing
with the recession provides the opportunity not
only to reduce costs, but also to stabilize the
turnover, secure the financing and to set-up
early-warning systems.
Depending on the sensitivity of the industry
with regard to the economic development and
on the individual situation of each company
measures can be initiated at different rates.
Companies having the luxury to dispose over
extensive equity operate under different
conditions than those, whose survival is under
Product diversity, multi-shift operation, high quality
immediate threat. In any case it is important to
standards – all this eats away at your line’s e ciency.
develop an own crisis compass providing
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different scenarios, because the development
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– too much working capital tight up
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– organizational complexity is too high
– missing measures for controlling
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4. to the reduced sales expectations – as far discounts, as price increases are difficult to These measures present changes of the
as possible introduce once the market recovers. already existing company set-up including its
– cost savings by means of reduction of fixed – avoiding of price wars and seeking active existing bundle of working processes and/or
costs: within a few months some fix cost cooperation with competition, involve additional activities. The key is therefore to
reduction measures can lower the break- suppliers and customers in finding and introduce the different measures to the
even-point. This should not be done through offering innovative solutions. corresponding working process of each
higher capacity utilization – which would employee concerned.
only meet lower sales – but through process Finance A method to implement, monitor and control
improvements and investments in new – Analyze alternative sources of financing in exceptional measures as well as improve and
production technology order to reschedule debt or transfer loans, optimize “regular” working processes of a
– product programme adjustments of the to make interest adjustments or to go for company and thus to realize cost savings
different production locations according to project financing – to name only a few and growth potential is performance
customer requirements and needs would – Strengthen your capital structure/equity management.
not only improve the cost situation but also basis: the sale of business units of the With performance management the working
the strategic positioning in the market company which do not belong to the core processes of the different divisions of a
business and/or are not profitable frees company and of every single employee are
Turnover growth through capital and reduces borrowing require- analyzed and optimized among each other. As
increased sales volumes: intensifying ments. The equity basis is one of the a consequence working and information
marketing actions determining factors for the survival in the processes are to be restructured and enable
– expansion of the customer service: if there crisis. thus the production of products and services at
is a lack of demand in existing markets the – Consideration of reduction in liabilities lower costs. At the same time it is checked how
development in customer services e. g. Research and Development: if possible do company targets are reflected in the targets of
through additional services or new offers not reduce investments but promote innovation each working process and each work place
and business concepts in the after-sales- management and use new ways of thinking description. Concrete goals per employee,
service can contribute to additional income Controlling as a steering instrument for derived from company targets, make sure that
and prepare the ground for continuous and company decisions and a management on the one hand side company targets are
strong turnover in the future. It is important tool: the introduction of processes and actually translated into actions and thus
to make sound decisions on the basis of systems (strategic risk management systems realized. On the other hand they have a
cost-/benefit analysis done in detail in or management and decision making on the significant motivating effect on each single
advance and to keep a close eye on costs basis of scorecards/indicators) improve the person.
– expansion of the product range by transparency and steerability of a company. The performance of each working process
complementary products and services, This ind of systems can be set up within few as well as each employee is measured by
developing of geographical markets that months. scores, and summarized in an overview – the
have been neglected so far and new so-called scorecard – in a timely manner (see
customer segments with the aim to figure 5).
generate income and to increase the use of Performance management Performance management provides the
existing sales structure. In this relation cost- as a tool for crisis management company management with steering tools,
benefit analysis and cost control are of which help them make company decisions.
utmost importance. To become a success these measures need to Especially in times of crisis they support you as
– making use of the available personnel and be implemented in time and in a proper way. the captain in navigating the ship through the
expansion of customer acquisition activities Their results need to be monitored and storm: you are informed in time, that „course“
– avoiding of price reductions and offering of corrective actions need to be taken to stay on deviations from budgets occur and where
different forms of discounts than quantity path. they occur. Thus you are in the position to
choose and introduce corresponding “course
Figure 5: corrections“ in time.
Software Having the control over your working processes
you also have the control over the costs and
performances of your company. And the
improved efficiency can be seen in your profit
numbers. Polls with regard to performance
management in 2008 done within small and
mid-size companies have shown that 20 per
cent of the companies had put a systematic
focus on both, costs and performances, and
thus had achieved increases of turnover and
profit of over ten per cent. Companies however
which had directed their attention towards
either costs or performances or neglected
performance management altogether achieved
significantly lower results.
24 I European Dairy Magazine 5/2009 (21. Jg.) I