Vietnam Dairy Products Joint Stock Company: Milk for everyone

Vietnam Dairy Products JSC is one of few state owned enterprises which pursues seamless innovation and brings value to the society.

Company Introduction

Vietnam Dairy Products Joint Stock Company (VDP) is the leading dairy products manufacturer in Vietnam. Dairy products account for over 95% of VDP’s revenue. Today, VDP holds 53% of market share in liquid milk, 84% in yogurt, 80% in condensed milk, and 18% in powder milk segment in Vietnam.

VDP is a highly effective companies at driving alignment between its business and operating models.

Plant

 

Business Model

VDP creates value by producing high nutritional and cost competitive dairy products, and captures value by utilizing VDP’s broaden distribution network to deliver the perishable products quickly to customers, especially for children who need high nutrition for their growth.

 

Operating Model

VDP has three main processes that transform its assets into valuable actions to support its business model and competitiveness: procurement of raw materials, production, and distribution.

 

Procurement of Raw Materials

The main raw material of dairy product is fresh and powder milk and its securement is vital for the operation. Lack of milk supply is the bottleneck of the manufacturing process. Moreover, since fresh milk is perishable, timely procurement is critical.

VDP utilizes three milk sources to realize secure and optimal procurement: in-house cow farms, import from an international market, and local cattle farmers.

First, VDP owns 46,000 milk cows in its 9 cow farms which serves 40% of the milk supply. Although it requires moderate capital expenditure, in-house cow farming serves as the stable material source of VDP.

Second, importing powder milk from Australia or New Zealand is another supply source. Powder milk is one of the main raw materials for yogurts and milk related beverages such as cocoa. However, international milk market is highly volatile and it affects the product cost while it is difficult to pass on the cost to the consumers due to its nature of basic goods. Hence, VDP is incentivized to diverse its milk supply resources other than importing (See Figure 1).

Figure 1: New Zealand Fonterra skim milk powder ultra-high treatment price (USD/MT)

price volatility

Source: JP Morgan

Finally, VDP procures the rest of fresh milk supply from local cattle farmers. In Vietnam, many farmers crop rice but cattle farming is more profitable even though it requires upfront capital investment to purchase cows. VDP provides financing, training support, and fertilization and fodder for cows to help smooth transition of farmers from rice cropping to cattle farming. VDP and cattle farmers sign contracts but VDP usually retains flexibility of the purchase volume. Hence, VDP secures flexible milk supply while not incurring excessive assets in its balance sheet.

 

Production

In Vietnam, disposable income per household varies significantly and it is important to provide a wide range of products so that the household can afford to purchase the dairy products, or VDP can change the perception of the customers that the products are affordable. Also, the consumption volume differs according to the growth stage of the child. Moreover, usually consumers have their preference on the types and taste of milk and yogurt: pasteurized and ultra-heat treatment sterilized milk, and flavor of yogurt etc. To address those issues, VDP procures the latest production machines from Swedish Tetra Pak, realizing automated filling and packaging for several different types of volume and flavors in one line. Furthermore, VDP sets up milk collection points and delivers collected milk directly to VDP’s factory. VDP connects a tank of milk collection vehicle and the Tetra machines directly to reduce setup time and throughput time, and to avoid infection by exposing to air and increase quality control efficiency.

 

Distribution

In order to execute and support VDP’s business model, the provision of high nutritional and cost competitive dairy products to consumers, short delivery from production facility to customers is important to maintain the high nutrition and quality of the products. Also, the majority of customer reach point is small individual retailers with limited shelf space. To address the delivery time, penetration to the individual retailers, and delivery frequency to refill the shell space, in addition to its direct salesforces who deal with more than 600 supermarkets, VDP utilizes 266 exclusive distributors to serve its 224,000 retail points, backed up by VDP’s advanced enterprises resource planning IT system developed by Oracle.

 

Overall, these unique features of the operating model not only serve to realize the core value of the business model but also contribute to VDP’s constant revenue growth while maintaining high profitability in the low profitable dairy products industry (See Figure 2).

Figure 2: Historical revenue and profitability trend of VDP (VDN bn)

performance

Source: JP Morgan

 

 

Reference:

 

 

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Student comments on Vietnam Dairy Products Joint Stock Company: Milk for everyone

  1. VDP’s approach to managing its local cattle farmers reminded me of the works that eChoupal did in India. With heavy investments that produced mutual benefits to VDP and the locals, VDP is able to turn this relationship into one of its competitive edges.

    1. Adzmel, that is exactly right. They have honed their supply chain network by a building coexistence relationship which becomoes vital to the community. In emerging markets, the cost to build the relationship is relatively low compared to the expected benefits for both parties.

  2. ‎Thank you for sharing VDP model! It seems like the company has enabled to establish large scale economic production aligned with country wide distribution. The company seems to have become competitive enough to avoid newcomers.

    I am also interested to know what was the key success factor that the company has come to this point. ‎It seems to be the quality of the product, effective production design, and relationship building with distributors may be reasons for success, but I am not sure which one is the most important.

    It seems that the company has effectively established it’s ‎position by properly groeing operational model and business model. Thanks again for sharing.

    1. Satoshi, its biggest strength is the distribution network. Given the nature of the product, I found quality of milk is really tough to differentiate as the taste is similar and every player weigh on quality control to retain customers’ reputation.

      In Vietnam, most of the customer reach points are individual papa-mama shops and customers are loyal to their close papa-mama shops because of the poor infrastructure condition. Therefore, penetration to the small papa-mama shops is the biggest diffrentiation factor.

  3. This is a fantastic example! I can clearly see the strengths of this business mostly thanks to its operational model. One curious thing is that the market share of each product seems very high and the company almost seems to dominate the market. The question I had was that there is a sufficient competition and that their strengths came as a result of competition? Or did they established a strong model nevertheless of the competition?

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