Milk Processors In Kenya (Research Paper Sample)

Introduction
The dairy sector plays a significant role in the global economy in terms of food security and nutrition with over 800 Billion litres of milk for consumption. Milk has significant protein levels and micronutrients which include magnesium, zinc, potassium, riboflavin, and vitamin B12 and B5. Traditionally, milk was a therapeutic food for the sick, elderly, and infants (Gerosa and Skoet, 2012) but nowadays, milk is a basic commodity in most households (KAM, 2019). According to Food Agricultural Organization (FAO, 2020) around 6 billion people globally consume milk and milk products. Milk has consistently been a major dietary component in Europe, America, and the Middle East countries. Other developing countries are colossal milk and milk products consumers (Oliveira et al., 2019).
Dairy act as a means out of poverty by providing over 470 million jobs globally. For instance, in Pakistan, dairy contributes 11% of gross domestic product (GDP) per annum (Shahid et al., 2012). The contribution of the dairy sector towards the achievement of sustainable development goals (SDGs) cannot go unnoticed. This has been through ending poverty through well-nourished-healthy people and sustainable nutritious products, achieving gender equality through women, and combating climate change (Roux, 2017). The Kenyan dairy sector contributes to over 4% national GDP and act as a high value sector through food providence and poverty alleviation. Further, national goals; the Big Four agenda – an economic blueprint and vision 2030 – a development blueprint can be achieved through the dairy sector. This will help promote food security in the country (The National Treasury and Planning, Kenya, 2019).
In most African countries’, the dairy sector is domestic and localised. Most milk is delivered in raw form directly to consumers bypassing milk processors (FAO, 2020). Milk processors have invested in processing capacities that need to be utilised. However, in Africa this is not the case. In Rwanda, underutilisation of milk processing capacities is by over 57%. In Uganda, milk processing capacity is underutilised by over 40%. Further, over 12 processing plants have closed down in Tanzania as a result of profit loss arising from inadequate capacity utilisation. Invested capacities are underutilised by over 29% in Tanzania. In Kenya, the underutilisation of processing capacities is by over 54% (Lokuruka, 2016).
Milk has characteristics that differentiate it from other agricultural products. The differences shape its trade, processing, and production. In raw form, milk is highly nutritious but very bulky and highly perishable (Knips, 2005) and thus requires processing immediately after collection (FAO, 2019). The underutilisation of processing capacities is a clear sign that processing is done but at low levels across Africa. Kenya is a heavy importer of milk powder and ghee from the United Kingdom since local processing cannot satisfy the growing demand (FAO, 2020). A surge in demand for processed milk products across Kenya is owed to growth in income and lifestyle (FAO, 2020; KAM, 2019). However the nation is unable to satisfy the demand resulting to a growth in imports (Lokuruka, 2016).
Kenya has been the largest dairy producer in Sub-Saharan Africa but recently has been facing a continuous decline in milk production and processing making her 3rd in position from Ethiopia and Tanzania (Ibrahim et al., 2018). This decline in rank has been attributed to seasonality in milk production, substandard input supplies, high fragmentation of supply chain, a shortage of adequate feeds, post-harvest losses, diminishing land needed for dairy use, and herd management practices that reduce the amounts of milk produced (FAO, 2011). Numerous challenges such as seasonality in milk production, milk quality issues, post-harvest losses, inadequate supply of inputs, fragmented supply chains, high cost of processing, and competition from the informal sector specifically face the milk processing firms in Kenya. The challenges affect the performance of milk processors in Kenya (Maina et al., 2020; Kibogy, 2019).
Compounded together, the problems have made it difficult for the milk processing plants to operate efficiently since only 12% of the milk produced makes it to their factories. Milk processors have invested in milk treatment plants, pasteurisers, refrigerators, pipes, spares and boilers which are expensive. However, the processing facilities are always underutilised by over 54% annually, and this raises the per litre fixed cost allocation (Lokuruka, 2016). Ultimately, the milk processing firms will charge a higher price for their processed milk products making the consumers prefer to buy milk from informal channels (Abdulsamad and Gereffi, 2016).
Since the liberalisation of the dairy sector in the 1990’s, two channels of marketing milk emerged; the formal and the informal channels. The former is a recognised trading channel which adopts capital intensive activities to create commodities for the end consumer while the latter involves sale of raw milk by farmers (Kibogy, 2019). The formal channel had one major milk processor, Kenya Cooperative Creameries (KCC) but currently the industry is dominated by four major players (New KCC, Sameer, Githunguri, and Brookside). Consolidation of firms have resulted in mergers and acquisitions (Brookside acquired spin knit, Buzeki, Delamere, and Ilara firms) and now there are about 36 milk processors in Kenya (Kibogy, 2019). Milk processors are a useful link between dairy farmers and the market. Milk processors purchase raw milk and help in the delivery of value-added products (yoghurt, ghee, milk powder, cheese) to the end consumers. The informal channel sells over 80% of the marketed milk in Kenya creating a great threat to the formal milk. This tends to reduce the formal channel operations (Lokuruka, 2016). There has been a reported 6.7% decline in the performance of the dairy industry in 2019. After liberalisation, farmers sold milk to new entrants in the processing sectors with an aim of creating more money. However, some of the milk processors closed down and defaulted the milk payments owed to farmers Some of the milk processors paid the farmers in small batches and this discouraged the farmers. Poor buyer-supplier relationships made the farmers opt to sell directly to consumer (Kibogy, 2020; Lokuruka, 2016).
A competitive dairy processing sector ought to provide affordable products that are easily accessible in the market. Therefore, dairy processing firms must recognise the role of strategic sourcing practices in improving their performance. Despite the critical role of strategic sourcing practices in improving performance, literature is scarce specifically in the milk supply chain in Kenya (Maina et al., 2020). Therefore, the study objective is to empirically explore how strategic sourcing affects firm performance of milk processors in Kenya.
Supply chains including the dairy supply chain are increasingly becoming complex and this call for effective management of buyer-supplier relationships as this enhances superior performance (Whipple et al., 2015). Patil and Gogte (2020) recognise that suppliers play a critical role in contributing to a firms’ success. This however can only be achieved when suppliers are selected and addressed through better relationships and through strategic sourcing. Kim and Chai (2017), define strategic sourcing as the process of managing suppliers and the supply network in a bid to enhance operational and financial objectives of a firm. The process of managing suppliers and forming a relationship with them forms a backbone in supply chain management and helps a firm achieve better performance (Dash et al., 2018). Jokela and Söderman further insist that relationships with suppliers are viable for the operations of a firm. Therefore, this study relies on supplier relationships as the building blocks of strategic sourcing. Harb et al. (2019), recognise that sourcing is capturing the interests of many and is receiving attention at the strategic desk. Actually, purchasing is now considered strategic and a call for the top management (Harb et al., 2018). The combined efforts of building strong and healthy relationships with suppliers and top management support establish the concept of strategic sourcing (Zhang et al., 2018).
Strategic sourcing in the dairy sector entails the effective management of a supply-side, which is mainly characterised by the need for raw materials inventory. The raw material is mostly milk that is highly perishable, prone to seasonality and suffers high competition. The informal sector in Kenya has been a major threat for the formal milk processing sector since the liberalisation of the dairy sector in the 1990’s. Farmers have been reluctant to sell milk to milk processors due to poor relationships that have existed between the two parties. The relationship problem was orchestrated by the new players who joined the milk processing sector after liberalisation. Farmers prefer selling directly to consumers bypassing milk processors (Lokuruka, 2016). Somewhat there exist poor communication between milk processors and farmers as the liberalisation brought about middlemen who limit the communication process (FAO, 2020). The key element of buyer supplier relationships is communication and should be adopted across industries to enhance performance.
Despite the surge in demand for processed milk products, Kenya fails to satisfy the demand. In fact, milk processors utilise their capacity annually by only 46%. Over 54% of milk processors capacities remain underutilised annually (Lokuruka, 2016). This calls for strategic sourcing practices. The sourcing function has become a very important asset i...