Supporting small-scale dairy plants in selecting market opportunities and milk payment systems using a spreadsheet model

• A simulation tool like DairyPlant can support small-scale dairies’ thinking.
• DairyPlant helps dairy processors to select their best product portfolio.
• DairyPlant can be used to evaluate the use of payment systems based on milk quality.

Simulation tools can be helpful for supporting stakeholders in better planning and managing dairy supply chains and exploring alternative ways of organizing chains. This paper presents a support approach dealing with two strategic issues that dairy processors face in interactions with their suppliers and buyers: (i) selecting their product portfolio according to market opportunities and (ii) designing milk payment systems encouraging dairy farmers to supply good quantity and quality milk throughout the year. This approach is based on the design of a spreadsheet application called DairyPlant developed with Excel®. DairyPlant calculates the daily profit obtained by a dairy processing unit and the gross revenue obtained by each of its suppliers according to its product portfolio, its milk payment system and its suppliers’ individual milk quantity and quality profile. Calculations take into account the processing yield defined by the software user for each marketed and intermediate product. Payment systems may include a base price and up to three quality components. The approach was tested in two small-scale dairy plants in the Mantaro Valley (Peru). For each plant, this included technical and economic data collection, construction of a reference scenario closed to the current plant situation, and simulation and evaluation of alternative portfolios or milk payment systems. Based on these simulations, dairy processors realized that (i) they could increase their total profits by modification of their current portfolio toward higher value products on the assumption that milk delivered to the plant attained a given quality; (ii) they did not adequately compensate farmers who delivered good quality milk but overpaid some who delivered poor quality milk; (iii) their profits could be increased by adoption of a payment system based on milk quality. Advantages and limits of DairyPlant are discussed in the light of an extended use of the support approach in other locations.