A COMPARATIVE ANALYSIS OF DAIRY COOPERATIVES ACCORDING TO QUALITY OF MANAGEMENT AND PRODUCTION

Mirosław Wasilewski, Artur Kowalczyk

ABSTRACT

The paper presents a comparative analysis of dairy cooperatives according to both quality of management and quality of production. The study results indicated that in regard to employment structure based on the level of education, the disparities between cooperatives of the A group and “Swietokrzyskie” (B group) cooperatives were quite remarkable – in the first group of cooperatives the proportion of employees with higher education was double of that in the second group. The figures also suggest clearer differences when milk quality is taken into consideration. In cooperatives of the A group, the extra class milk noted a threefold higher percentage (76.2%) of total purchased milk than in the “Swietokrzyskie” cooperatives, whereas, respectively, the average procurement price of milk was 0.21 PLN higher, in 2001. Cooperatives of the A group had a considerably greater product assortment, consisting primarily of products based on high quality raw milk, while “Swietokrzyskie” cooperatives did no

Key words: dairy cooperatives, the quantity of the management and production standards, the assortment of dairy production..

INTRODUCTION

Every entrepreneur is expected to practice resourceful management, which is a process of never-ending restructuring, depending on creative learning, and adjusting to a dynamic competitive environment. Among many competitive priorities, a central consideration is in relation to quality. When quality costs are measurable, competition based upon quality is a reasonable expectation. In many enterprises there is a lack of consciousness of quality cost amounts in the whole organization, and also in cross sections of particular products. The cost evidence system is generally not adjusted to quality management, which must become a strategic aim of a firm functioning in competitive environment. Interest in quality problems have been dictated by practical needs which occur mainly in production, exchange and export of products. In a market economy, success or failure of an enterprise depends, above all, on the quality of the offered products, but also, in great measure, on its functioning quality. It is the level of the products’ quality that determines market position and every producer’s success, but gaining the high-quality final products is possible only when the whole production process, the environment and processing conditions stay at the highest level. Therefore, the term quality can be examined in several aspects, not only as the quality of the final product. An appropriate quality level contributes to obtaining profitable economic effects for dairy cooperatives [5].

METHODOLOGY

The aim of this research was to conduct a competitive analysis of dairy cooperatives to analyze the quality of management and production. Two groups of dairy cooperatives have been analyzed. The first group (A) contains dairy cooperatives which are allowed to export to European Union member countries markets. The second group (B) is made up of dairy cooperatives which are functioning in the Swietokrzyskie province and do not possess such export rights. The average indicators marking both of the groups of cooperatives in 1998-2001 have been shown. On the basis of a list of Polish dairy plants allowed to export to EU member countries markets (A category), according to the state on 31.12.2001, when there were 25 plants in it, 12 plants functioning as a cooperative were marked out. Eight dairy cooperatives agreed to be researched. This group of cooperatives is designated as the A group. The second group of cooperatives (named as the B group or Swietokrzyskie cooperatives) contains dairy coopera tives located in the Swietokrzyskie province. In this area, the cooperative form of property represents almost the whole population of milk processing plants, for 11 out of 12 plants are cooperatives. Moreover, eight dairy cooperatives agreed to take part in the research. In sum, 16 cooperatives were included in the research, eight from each group. This allows the authors to claim that the number of cooperatives included in the research ensures its representative character and makes the basis for making conclusions about the whole population.

RESULTS OF THE RESEARCH

Among the many problems faced by the analyzed dairy cooperatives, a central issue was the need for the right managing personnel on every management level. This is critical because management make the most important decisions concerning planning, organization, motivation employees and control. The measurement of education levels allowed for the analysis of the quality of human resources in dairy cooperatives. There are considerable differences between the examined groups of cooperatives, which is illustrated in table 1. In all analyzed years, the cooperatives from the A group had a substantially higher average percentage of people with higher education than cooperatives in the Swietokrzyskie province. The share fluctuated in the A group cooperatives from 6.8% in 1998 to 7.9% in 2001, while in the B group cooperatives it fluctuated from 1.9% to 3.9%. The percent of employees with higher education in the A group cooperatives was from 2 to 3.5 times higher than in the B gr oup cooperatives. A positive point is that the Swietokrzyskie cooperatives narrowed in differences in the average share of people with higher education during the researched period compared to the A cooperatives. The differences are still considerable, however, so the Swietokrzyskie cooperatives should still be interested in recruiting educated engineering-technical personnel and specialists in management, finance and marketing. Improvement of personnel quality in these cooperatives could result in increased activity and competitive growth. The percentage of employees with secondary education was higher in the A group cooperatives, rising to 53.7% in 2001, whereas in the B group cooperatives it was 41.9%. The A group of cooperatives is distinguished by an approximately 11 percentage points higher average share of employees with a secondary education, whereas the average share of the least educated employees (vocational secondary and primary) in the Swietokrzyskie cooperatives group decreased to 54.2% in 2001 and was 12% higher on average than in the A group cooperatives. Although a decrease in the percentage of people with the lowest qualifications took place during the analyzed period, it was to a lower extent than in the A group cooperatives. The employment structure based on education levels in the Swietokrzyskie cooperatives is still worse than in the A group cooperatives.

A crucial determinant of high quality dairy production is the quality of purchased milk. The A group cooperatives were better able to ensure high quality basic material for production. An average percentage of extra class milk purchased by these cooperatives increased by 30.1 percentage points, from 46.1% in 1998 to 76,2% in 2001 (table 2). In the second group of cooperatives, there was also progress in milk material quality improvement as extra class milk percentages increased from a very low level in 1998 (6.3%) to 24.7% in 2001. However, the percentage of best quality milk purchases by the B group cooperatives is still over three times less than in the A group and it has not yet even reached the average level of A group cooperatives in the first analyzed year. At the same time, the Swietokrzyskie cooperatives purchase on average less than half the extra class milk than is done on the national scale (58%) [1]. In the first and the second years of research, in the Swi etokrzyskie cooperatives, extra class milk constituted only a 6-11% share in the purchase of total material, whereas the worst milk share (2^nd and 3^rd class) constituted no less than 68-72%. In the following years, an increase of extra class milk percentages took place, but the pace of these changes was not enough. In the researched period there was a decrease in 3^rd class milk percentages, but at the same time the share of 1^st and 2^nd class milk increased. This situation resulted in extra class milk purchases at very low levels, while the worst milk share (2^nd and 3^rd class) constituted more than 1/3 of the purchases. The quality of milk purchased by the Swietokrzyskie cooperatives is still worse than by the A group cooperatives. One of the main reasons for this situation could be the lower concentration of milk production in the Swietokrzyskie farms. As a result, the average material supplies to processing plants in the Swietokrz yskie province are much lower. What is more, in the case of small milk production there is no economical basis for buying a milker or a chilling milk container. Apart from the disadvantageous impact of this situation on dairy farms’ potential for investing in the improvement of produced milk quality, low average amounts of material supplies to cooperatives definitely increase purchase costs, which weakens competitiveness of the cooperatives in the Swietokrzyskie province (higher costs of transport, milk tests, keeping material services, etc.).

The dairy cooperatives in the Swietokrzyskie province pay their suppliers lower prices for milk by about 25% than the prices paid by the A group cooperatives. Average prices paid for milk in the Swietokrzyskie province rose from 0.51 PLN/l in 1998 to 0.64 PLN/l in 2001 (table 3). The dynamics of the price increase was very similar in both of the groups and amounted about 25% in 1998-2001, while differences between the highest and the lowest prices amount was nearly 100%. This results in development opportunities for most of the dairy farms in the Swietokrzyskie province being much lower than farms, which are delivering milk to the A group cooperatives. These farms to a large extent have limited their investment opportunities on account of the unprofitability of milk production.

The average amount of supplies to the A group cooperatives amounted to appropriately 17.93 thousand litres in 1998 and 24.18 thousand litres in 2001. In the second analyzed group of cooperatives, the average amount of supplies increased from 5.69 thousand litres in 1998 to 7.10 thousand litres in 2001. In this group the increase in the average amount of supplies from one supplier by about 2% had taken place, but at the same time it was more than 10 percentage points lower than the increase registered in the group of cooperatives allowed to export to the EU market. So the differences in the average amount of milk supplies deepened. In the A group cooperatives, there was one firm which registered the largest material supplies. The firm purchased more than 67 thousands litres of milk from one supplier, while in the group of Swietokrzyskie cooperatives there were no companies that surpassed the average supply amount of more than 10 thousands litres from one supplier a year.

There are diversified conditions of researched cooperatives groups’ functioning. However, the quality of the material basis in the Swietokrzyskie cooperatives has changed positively in the researched four-year period (e.g. increase in average amount of supplies), but the pace of registered changes was lower than the top dairy cooperatives in the country. In connection with that, the A group cooperatives had means for investments in milking machines and modern cooling machines, which plays the significant role in the cooling chain and determines the possibility of producing high quality products. In agricultural farms which supply milk in the Swietokrzyskie province, manual milking and cooling in cans by using cold water are still very common. That way of getting and cooling milk negatively impacts the microbiologic quality of fresh milk.

The end product is the central instrument in being competitive in the dairy sector. It is (aside from the price) the most often used and the most essential component in developing a competitive advantage. The market and economic conditions, which make the producers look for new sale markets, caused in particular cooperatives the need to make product assortment changes in order to adjust their own offerings to match customers’ needs. The researched groups of dairy cooperatives are significantly diverse in their offered assortment of products. The A group cooperatives produce highly processed products, which realize the use of modern technologies. They also have a large number of product groups. On the other hand, in the cooperatives of the Swietokrzyskie province, not only does the production of less processed products predominate, but there are fewer product offerings. During the researched period a mean number of assortment groups offered by the Swietokrzyskie cooperatives was eight, wher eas in the A group cooperatives it fluctuated from nine in 1998 to 11 in 2001 (table 4). In the A group cooperatives there was an increase in the number of product offerings, mainly UHT products and ripening cheeses, but also flavoured cottage cheeses and other milk drinks. The range of dairy products offerings was broadened to include products that required the highest quality milk material and more complicated production technology. The Swietokrzyskie cooperatives during this period did not broaden the number of assorted product groups, still producing less processed and lower quality products.

All the cooperatives, from both the A and B groups, produce butter and cottage cheeses. Most also offer milk for eating. So there are produced dairy products at low levels of processing which do not need to use modern technologies, which results in a weaker competitive position than in the case of product groups at high levels of processing. All the Swietokrzyskie cooperatives produce cream, whereas in the second group of cooperatives, cream is offered by six-seven firms. At the same time, there is no cooperative in the Swietokrzyskie province that produces modern and high quality product groups such as: UHT milk, condensed milk, ice-creams and desserts. Only three of eight cooperatives in the B groups produce ripening cheeses, flavoured cottage cheeses and butter with oil. This is half of what is the case of the A group cooperatives.

The researched cooperatives differ in the scale of resale of purchased milk for other firms to further process. No less than seven of eight Swietokrzyskie cooperatives offer milk for further processing. It may prove some problems in some amount of material on their own or there is no possibility to sell additional production. At the same time there is no possibility to introduce new assortment groups. The reason for this state is the current structure of technology at the Swietokrzyskie firms, which is an additional barrier and makes it impossible to develop a production profile flexible enough to adjust to seasonal fluctuations of demand and market requirements. The A group cooperatives can invest in modern equipment, devices and technological lines of production of modern dairy goods resulting in a high level of processing and a higher profitability of production than traditional means. Their machines, together with using top quality material, ensure getting top quality dairy products. T he A group cooperatives are at the same time utilizing more concentrated production practices, which makes it possible to extend specialisation processes. In these cooperatives, longer production series of high and repeatable quality foodstuffs are realized. Large scale standard production reduces unit production costs, which improves the competitiveness of dairy firms and ensures larger profits. In the Swietokrzyskie cooperatives concentrated production is relatively small, and as a result there is no visible progress in production specialization in particular dairy firms. Their competitive position in the market is worsening, and they have been unable to take advantage of the reality that diversity of production reduces market risk.

As a consequence of the higher quality dairy products being offered by cooperatives from the A group, there is participation in trade fairs, exhibitions and competitions. The cooperatives state that they take part in at least several events of that kind every year. Its aim is, among other things, to highlight and emphasize the following advantages of their products: taste, nutrition, health and diet, but most of all to draw customers’ attention to the high quality. The A group cooperatives, when planning production of new products, consider the preferences of those customers who are searching for healthy products of lower fat and calories. They also consider customers who are looking for products containing less salt and artificial preservatives. The A group cooperatives own quality certificates and awards like: the quality certificate “Q”, the “Now Poland” mark (“Teraz Polska”), the “Polish Good Food” certificate (“Dobra Polska Żywność”), the “Top Quality Product” award, the medal of Polag ra, The Most Interesting Foodstuff award and HACCP and ISO systems certifications. The B group of cooperatives is significantly different from the A group cooperatives. Only two cooperatives from the B group claim to participate in fairs or exhibitions, whereas others do not use these forms of product promotion. The reasons given were that they had a lower quality and less diversified assortment of products to offer. Additionally, the B group cooperatives had a weaker financial situation, and lacked funds to participate in this kind of promotion.

In order to ensure the right quality and safety of produced food, the implementation of quality management systems ISO (9001:2000) and HACCP became necessary. At the end of 2001, six of the A group cooperatives implemented quality management system ISO, while all of them had the HACCP system. At the same time, none of cooperatives in the Swietokrzyskie province implemented ISO or HACCP systems (table 5). This results in a competitive advantage for the A group cooperatives, because HACCP and ISO assure not only greater health and safety and the possibility of getting top quality production effects, but also other benefits. The analysis of processing weaknesses connected to both of the systems is a great opportunity to review the production process and enables the firms to manage their materials more effectively. It may result in avoiding a loss, thanks to a reduction in the number of customer complaints and making the staff more involved in the production process, As a result, one can expect an increase in the quality of the dairy products.

Those cooperatives that have not started adjusting their production to meet ISO or HACCP standards claim to have no financial or technical means of doing so. In this situation, their existence in the future is really uncertain because of the expectations the HACCP system puts on food producers.

It’s essential that dairy cooperatives adjust to meet the market economy requirements for milk and dairy product distribution. The main role of an effective strategy of distribution in a market economy resulting in increased competitiveness is to ensure continuity of high quality dairy products to the final consumers. According to the theory of consumer behaviour on the market, lack of consistency makes consumer loyalty in regards to purchasing dairy products from particular firms disappear. Regularity and continuity of market supplies can be guaranteed only by large dairy firms, processing hundreds millions litres of milk every year [2].

In the Swietokrzyskie province, due to the production of products characterised by short expirations dates, efficient distribution activities are essential. The A group cooperatives can offer not only products with much longer expiration dates (UHT products, ripening cheeses, condensed milk, powder milk), but also modern fresh dairy products. This assortment group contains of a number of products with common features that are natural, fresh, in modern functional packages and convenient to use. These products must be transferred by distribution systems with consistent cooling, efficiently managed and concentrated on the fastest delivery of products to the final customer.

The percentage of sales in particular sales markets for the researched dairy cooperatives are presented in table 6. In 2001, on average about 31% of the A group cooperatives sales were sent to domestic sale markets, although the average share of regional markets sales increased to 29%. In the researched period the average share of international market sales increased by more than two percentage points. In 2001, on average in the A group cooperatives, more than 1/5 of the dairy production was sent for export. In the A group cooperatives the export share fluctuated from 4% to 40% in 1998 and from 5% to 47% in 2001. Western Europe countries (all the A group cooperatives sell their products in EU countries) and Central-Eastern Europe (five kept selling in these markets) were the main sales markets. Dairy products from that group of cooperatives were also sold to countries in the Middle East, whole America and also in Africa and Indonesia. The main export goods were powdere d milk, butter and ripening cheeses. A very different sales structure was identified in the second group of researched dairy cooperatives. Sales in the B group cooperatives are concentrated in local and regional markets (about 80% of the whole sales amount). On average in the Swietokrzyskie cooperatives group, from 17% in 1998 to 20% in 2001 of the dairy products were delivered to the domestic market. However, in this group, some cooperatives do not sell their products on the domestic market at all. The main sales markets for them are local and regional – in neighbouring provinces. The range of sales in these cooperatives is territorially limited. On the other hand, one of these cooperatives concentrated its sales mainly on regional and domestic markets. This is the cooperative that has the largest milk processing during the year and offers products at high processing levels. The Swietokrzyskie cooperatives do not sell their products in international markets.

The A group cooperatives have more diversified sale markets for their products, whereas the Swietokrzyskie cooperatives concentrate on the closest markets. This may be due to the small scale production runs in the Swietokrzyskie cooperatives and the lack of modern dairy products offered. The A group cooperatives can offer modern, top quality products that can compete in international markets. Moreover, large scale activities run by them (the average material processing during a year is several times larger than in the Swietokrzyskie cooperatives) forces them to search for customers beyond the area of their production, because there is a much larger supply than registered demand (i.e. Podlasie area).

All the A group cooperatives deliver their products to supermarket chains and hypermarkets. Two cooperatives in this group deliver dairy products as brand-name products, whereas the other cooperatives launched and developed products which are then sold under particular chain brands. In the B group of Swietokrzyskie cooperatives, only one cooperative sells its products in multi-surface shops. Since the supermarket chains and hypermarkets demand assurance of consistent quality and specifications of delivered products, from some products the certificate of the quality management system – ISO 9000 is demanded. Special attention is also paid to hygienic standards and expiration dates. Supermarket chains require suppliers to service the shelves by helping with placing and completing orders, and taking care about appearance and the proper amount of goods on a shelf, to ensure adequate supplies and to organise promotion [4].

The Swietokrzyskie cooperatives, in order to cooperate with supermarket chains, very often have to accept lower prices, long payment schedules and payments for a shelf. These cooperatives have too small of a bargaining position to be able to establish direct cooperation with large market groups, especially with supermarkets, which would allow them to make profit from the possibility of a considerable reduction of distribution costs by assuring large amounts of product sales. These cooperatives use short modern distribution channels and establish trade contracts directly with supermarkets.

Local markets and functioning in their small trade firms is an opportunity for small dairy cooperatives from the B group. In the case of the Polish dairy processing industry, it is forecasted that small processing firms will soon be searching for their own market niches and offering new generation modern products [3]. Small trade organizations are natural partners for small dairy cooperatives in the Swietokrzyskie province. In this situation, they should aspire to integrate market partner strategies and common product policies. Seizing this advantage depends on not only the processing firms, but also the trade firms’ market activity.

The A group cooperatives are better able to access the distribution channels used by them, and at the same time are forecasting increasingly concentrated activities in nation-wide wholesale sale areas. In the Swietokrzyskie cooperatives, the distribution channels of dairy products are assumed to be only enough or even weak. These cooperatives want to increase their sales concentration in the regional and local wholesale markets. The A group cooperatives use more modern, better organised distribution channels, which assure fulfilling customers needs on a higher level. These cooperatives have more quickly adopted themselves to new product demands, flexibly adjusting the production structure to reflect changing consumer preferences in new economic situations. Apart from the pro-market orientation of the production structure, these cooperatives organise distribution on their own and make their own sale channels, at the same time trying to participate actively in the international market. On th e other hand, the Swietokrzyskie cooperatives still use mostly conventional sales channels which are distinguished by impermanent trade collocations, with a relatively small amount of marketing activities.

CONCLUSION

The paper presents a comparative analysis of dairy cooperatives according to their quality of management and production. On the basis of the research, the following conclusions were framed:

1. The percentage of employees with higher education levels was twice as large in the A group cooperatives than in the B group Swietokrzyskie cooperatives, whereas the differences between the number of employees with a secondary education was smaller on the level of 12 percentage points for the cooperatives which export on EU markets (the A group). The Swietokrzyskie cooperatives dominated in the percentage of employees with a vocational secondary education. Many dairy cooperatives jobs do not demand very high qualifications on particular workstations, but the 25 percentage points higher share of less educated employees in the B group of cooperatives can limit transformations in improving quality and by that – also their competitiveness.

2. The A group cooperatives were distinguished by an absolutely higher extra class milk share in its whole purchases than the Swietokrzyskie cooperatives. However, the dynamics of the increase of that milk class was higher in the B group cooperatives, which must be recognised as very advantageous, but it was caused by a very low percentage of extra class milk purchases in the initial year (on the level of 6.3%), while in the A group cooperatives that share amounted to 46.1%. In the A group cooperatives, the share of extra class milk purchases increased by about 30.1 percentage points, whereas in the B group cooperatives only by 18.4 percentage points. The high milk quality allows for the production of more diversified dairy products. These collocations had their impact on the purchase price, which was higher by 0.21 PLN/l in 2001 in the A group cooperatives, although the speed of changes in both groups was alike. At the same time, the average amount of purchases in the A group cooperatives allowed profit opportunities due to the scale effect and reduced unit costs of milk purchases.

3. The assortment range of products in the A group cooperatives was considerably higher, especially for products that demand the highest quality of milk material, and where the technology of production is more complicated. The Swietokrzyskie cooperatives, on the other hand, did not change their product assortments, and continued to make products requiring lower processing levels. At the same time, it must be stressed that almost all of the Swietokrzyskie cooperatives resell milk to other subjects for further processing. This results in potential problems with material processing or with their product sales. The A group cooperatives are larger units, with larger levels of concentrated production, which allows further increases in specialised processing. The lower quality products offered by the Swietokrzyskie cooperatives is caused by less modern plants, as they do not have ISO and HACCP norms, whereas all the A group cooperatives fulfilled ISO norms, and most of them – HACCP norms. As the consequence, there are greater possibilities of product sales, which have resulted is a 21.5% share of revenues from the sale of dairy products in international markets. None of the B group cooperatives exported their products, but rather sold half their production in local markets.

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4. Sznajder M., 1999: Dairy economy. Ed. Agricultural University of Poznan, Poznan.

5. Wasilewski M., Kowalczyk A., 2003a. Financial standing of dairy cooperatives in Poland. Scientific Book of Warsaw Agricultural University (SGGW) No 50. Economics and Organisation of Food Economy, Ed. Warsaw Agricultural University, Warsaw.

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