Supply chain key to economic growth

16 June 2015

One of the lessons coming out of China is that supply chain integrity matters hugely, says John Penno. Country of origin, not so much.

Canterbury-based dairy processor Synlait Milk pays close attention to what the end-users of its high-spec milk powder think and how they behave. One conclusion: supply chain integrity matters hugely. Country of origin, not so much.

Research into the Chinese market, for example, suggests that people there who buy infant formula are well educated and well informed, and tend not to be overly concerned where the various dairy suppliers are based. Synlait has developed a profile of these shoppers. The company calls them "Tiger Mums" after a style of parenting, common in East Asia, in which mothers push their children to excel academically and to achieve financially successful careers.

The Synlait Tiger Mum typically is an only child, aged 25-35, and from a family of means. She will likely have many aunts and uncles but few nephews or nieces and, as a result, a great many adults will be interested in her life. This translates into a great deal of pressure to perform.

"If there is one word that describes them it is 'competitive'. They don't have friends at school, they have competitors," says Synlait co-founder and managing director Dr John Penno.

They are accepted into the best schools and universities, he says, and thanks to that competitive spirit,  they land good jobs and therefore high disposable incomes after graduation.

"About four years ago, we decided that we needed to focus on three or four things and do them well. In fact we have narrowed that down to one thing – infant formula. We determined that Tiger Mum was the demographic we would target and we did the classic marketing exercise of bringing together focus groups," says Penno.

One early realisation was that in a country of 500 million internet users, Tiger Mums "live online", spending a surprising six hours a day digitally connected to the world. Even four years ago, says Penno, Tiger Mums all had smart phones.

That is significant, given that in 2014, for the first time, the volume of infant formula sold online in China passed that for the supermarket channel. Internet sales of the product are on course to soon equal the combined volume sold through supermarkets and the third major channel – baby stores.

But why would young, well-educated mothers choose to buy such a sensitive product online?  The focus groups told Penno that they trusted online retailers because if they put a foot wrong the market would reject them. Unlike customers of brick and mortar stores, online shoppers could quickly flag a disreputable trader and post comments about substandard products or services.

It also became clear that Tiger Mums read New Zealand news reports when infant formula scandals hit the headlines.

"These events have proved extremely hard for anyone to control because these people are looking at New Zealand press releases in real time, and are involved in the discussion," says Penno.                           

Equally worrying was the realisation that they did not differentiate between North American, European, Australian and New Zealand dairy suppliers, and were suspicious of claims made for the quality and safety of any infant formula brand.

The focus groups also stressed the importance of looking after diary farm workers. The logic was that neglected workers were more likely to make mistakes and compromise product quality.

So what was Synlait's response?

"What you have to do is prove the integrity of your particular product. You need systems, procedures and verification, and it must all be made available to the customer," he says.

"We decided to set up information systems across the supply channel that would give these customers the necessary reassurance. It is important to remember that we do not produce consumer products under our own brands. We are pure business-to-business manufacturer. We work with our farmers, and we work with brand owners or with manufacturers who use our products as ingredients."

The foundation of Synlait's strategy was an on-farm certification programme called 'Lead with Pride' – which the company claims is Australasia's only internationally accredited ISO 65 diary farm assurance system. The programme is built on four pillars: environmental protection, animal health and welfare, milk quality, and social responsibility.

"It is a very demanding programme. It takes our suppliers on average 18 months to work through it and about $100,000 in capital investment. But at the end of the process they are in a position where we can pay them a premium for their milk."

Synlait then benchmarked its manufacturing processes against the best in the world, and signed up one of the leading experts to overhaul its New Zealand plant and oversee the building of a new canning line which incorporates identification processes able to dovetail into online traceability systems. Customers can then access the information.

Penno says building a robust, transparent supply chain that meets customer expectations is the key to longevity in the Chinese market.

Dr John Penno visited the Business School in May 2015 where he spoke at a Supply Chain Management Forum on the role of the supply chain in global business.

John Penno

John Penno is Managing Director and CEO of Synlait Milk.

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