For the Nordic dairy industry, the future will favor the bold. Those who see radical change as an opportunity to learn, evolve, and grow stronger. Below, we talk about the outlook for producers in particular, the challenges and opportunities, and practical solutions that are not only relevant to dairy, but producers of other food categories as well.
Drinking fresh milk has been the Nordic way for centuries: Finland has a longstanding position as the world’s top dairy consumer while Sweden, Denmark, Norway, and Iceland are included in every annual top 15 list. But times have been changing and consumption continues to steadily decrease year-on-year. And while the recent pandemic brought with it a surprising temporary spike in retail sales, the industry remains at a crossroads: embrace radical change or continue to miss out on game-changing opportunities. It’s a daunting task, but the dairy industry has never been one to shy away from a good challenge.
In this article, we combine our insights from two decades of helping dairy, and other food producers to strategically improve everything from operational efficiencies, supply chain strategies, product innovation and everything in between. The practical solutions outlined in this article are equally relevant to other categories of food production (particularly meat and fish) with many facing similar strategic challenges. So keep reading as we start off with our top three challenges that are shaping the industry’s future.
What are the biggest challenges for the dairy industry?
#1 Fresh milk consumption continues to decline
It’s well documented that the industry saw a significant spike in dairy consumption during the height of the pandemic, but that the underlying trend of declining volume remains. The reasons vary: from sustainability and environmental concerns to dietary changes and the increasing popularity of plant-based alternatives. Combined with an unavoidably intensive distribution process, economies of scale are quickly lost.
We see the solution to this challenge as an industry-wide collaboration and significant collective effort to change consumer perceptions and behavior. The pandemic has created a critical springboard for this to happen with a return to basic food categories and known immunity boosters – most notably dairy, fruits and vegetables – being clear post-COVID trends. Tapping into this momentum will be absolutely key to the dairy industry’s future trajectory.
#2 Commodity and energy prices remain high
It’s not news that global commodity and energy prices continue to affect all food producers. A practical example is a recent dairy producer client who wanted to explore the investment cost of new equipment as part of a broader project. Our first estimate was done in 2021 and, when it was revisited in 2022, the cost for the exact same equipment had doubled.
From a dairy farmer perspective, extreme increases in agriculture input costs like fertilizer and feed prices place an additional squeeze on farm profitability and margins.
#3 Reduced benefits from economies of scale
As an industry with a notoriously intense and costly distribution process, dairy producers are particularly vulnerable to economies of scale. If lost, already tight margins can very easily turn red, accumulated profits are quickly lost.
From challenge to strategic solutions
At the moment, the stakes are high for dairy producers and there is a clear sense of urgency for transformation. But where do you start with such a seemingly daunting task? With more than 20 years of experience in helping dairy, and other food producers determine just that, here are our top learning and insights to get you started.
#1 Be bold enough to make decisions
To bring about the radical transformation that the dairy production industry needs, cross-functional decision making is an absolute must. Previously, it was possible to improve one specific area at a time like production, distribution, innovation, or sourcing. Now, a far more holistic view is required that takes all areas into account with improvements running concurrently for maximum and fast-tracked impact.
And while there’s truth in Winston Churchill’s wisdom when he said: “Never let a good crisis go to waste”, it should also not be the only time that bold decisions are made. Always remaining future focused and proactively making big (and small) decisions whenever required is key to remaining relevant in any future.
Whether in a time crisis or state of smooth sailing, a fact and data-based approach is critical to success. Our projects always start out as fact-finding missions and involve extensive data gathering and analyses that include anything from crunching ERP data to actual measurements on the floor and everything in between. After all, we can’t control what we can’t measure. Often, the data will reveal that your most effective transformation starting point is not at all where, or what, you thought it should be.
Key to this process is technology, and an urgent shift in investment in this area of business is required. Historically, the vast majority of spend is geared towards hardware (equipment), as opposed to the software, IT support, and skills to deliver the data that is now critical to the dairy producer’s future, profitability, and cost-reduction efforts.
For example, in a short 12-week assessment project, we were able to identify a three percent cost reduction as part of the client’s revenue. Without data, this would never have been possible.
#2 Take a ruthless approach to complexity
Complexity comes in many shapes and forms. Some are predictable (like pure product development and innovation where the level of complexity is relatively set) while others are difficult to see until it is too late (like the ripple effect of operational complexities that product development and innovation create across the entire organization).
For example, in many client projects, we find significant cost and margin improvements when the true cost to serve is investigated – the actual margin of products and the relationship between shared cost drivers.
Key to the process is to involve all organizational functions in the complexity discussion to fully understand the butterfly effect of every decision. A typical example that we often encounter is that the majority of discussions are focused on increased sales and profitability. How a product will be delivered to customers, the actual fulfillment model, is only considered later in the process, often when the marketing and sales teams have already made numerous deals. Often, the result is a highly complex supply chain that never achieves the scale that was initially predicted or envisioned.
#3 Be bold enough to pause
In a world where pace, intensity, and urgency collide, it’s far more natural to break into a sprint instead of taking a mind-clearing stroll. The best strategy in this harsh business climate, however, may be to hit the pause button, take a step back and make sure that you have the right insights and knowledge to win the race. Make sure that your view is cross-functional. Key questions can span:
- Data and facts: Do I have the right insights to make informed decisions?
- Structure: Do I have the right production network in place and are we able to keep up with the modern way of producing?
- Operational efficiency: In an ideal world, what would operational efficiency look like and do I have the right insights, routines, and practices in place to facilitate this?
- Product: Do I have the right products, am I producing them in the most efficient way possible, and does my logistic and distribution model support optimal outcomes?
As you take the above pause, don’t forget to also identify the easy things, those quick wins or fixes that could have an immediate impact. In fact, for most of our clients, there is as much that should be done in the short-term, as in the long-term. Typical examples that we often identify during our client-consultation process are operational efficiencies of machines, meeting structures, waste reduction and improvements in planning.
#4 Be bold enough to innovate
Knowing where to start is often the most difficult part. Innovation for sustainability is an obvious one and arguably one of the biggest drivers of change today. And while there is of course much to be done from a regulatory perspective alone, these “market-imposed innovations” pose significant opportunities to ensure the industry’s future fitness and relevance, particularly in a consumer market that places an increasing premium on sustainability.
Taking a broader internal view of product innovation, the challenge is to achieve a balance between efficiency and innovation. Few are getting it right with most excelling at efficiency, but lacking in innovation, or vice versa.
In some cases, an efficiency focus can even lead to innovation. One of our recent efficiency projects revealed an opportunity in the client’s product portfolio and our view expanded to a fully cross-functional one. As a result, quick-win innovations were revealed (defining the most optimal product mix), as well as longer-term innovation projects.
Also remember that innovation is never limited to product only. For example, in a recent project, we explored a Norwegian B2B client’s business model and possibly expanding it to a marketplace (or Amazon) model. This change to a direct-to-customer approach would see their logistic capabilities greatly expanding which, in turn, would open a whole new world of other innovation opportunities.
Start your transformation journey with BearingPoint
With more than 20 years of experience in helping dairy, and other food producers to improve efficiencies and define their transformation journeys, BearingPoint intrinsically understands your full value chain. We see the full picture and, as a result, understand every function, interrelation, and the vast opportunity that each represents.
