A market for local sourcing

It begins with Black Face, White Flower and Second Flower – and hundreds of millions of cows like them. Confronted with shortages of raw materials, long supply chains and growing concerns over food safety, milk producers in China are rolling up their sleeves and getting down to the farm.

They are just some among many companies taking more direct control of supply chains across the globe. The aim is to ensure supply and quality, but also to remove some of the volatility from pricing. Hence PepsiCo's decision to grow potatoes in China for its crisp brands and SABMiller's farming of barley in Africa for its beer.

As a fresh foodstuff with a short shelf life, however, milk presents companies with some of the biggest challenges. That was highlighted in the melamine scandal of 2008, when unscrupulous farmers and traders in China spiked milk to boost the protein content, leaving at least six babies dead and another 300,000 sick.

China presents particular logistical challenges. Scale is one: farms mostly tend to be small, a legacy of the communist policy of parcelling out little-but-equal plots. Farming skills and technology are often outdated.

Faced with these challenges, Nestle led the way for multinationals two decades ago. The world's biggest food group realised that the combination of small farms and dubious safety was a toxic one, and set about creating its own supply chain.

"We realised there would be these risks," says Roland Decorvet, the company's new chief executive for China. "And that's why we wanted full control of the supply chain."


That control sees milk pass from udder to factory in a matter of hours, virtually all under the eye of the multinational. The chain starts with some 25,000 individual farmers, whose milk is collected and vetted at 164 stations dotted around the eastern provinces of China.

Few other companies have developed such a complex supply chain. France's Danone and its erstwhile joint-venture partner Wahaha both import milk powder from overseas for the infant formula they sell in China. For yoghurt, Danone buys raw milk locally but only from large dairy farms.