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PT. Cisarua Mountain Dairy (henceforth referred to as “Cimory”), a producer of dairy products in Indonesia, was built in 2006 as a subsidiary of Macro Group, which owns  several  companies operating  in producing  and distributing daily consumption products. The director of the company Mr. Bambang Sutantio is a philanthropist  and  is well  known  for  his  passion,  devotion  and  contribution towards  public  good; He  helps  Indonesians  consume  healthy  and  nutritious food  for  a  healthy  life.  This  case  highlights  Cimory  as  an  example  of  how  a company  helps  alleviate  poverty  by  forging  a  mutually  beneficial  business partnership between the core business activity (Cimory), and local actors (dairy farmers).  Drawing  from  the  philosophy  of  enlightened  marketing,  Cimory engages  the  supplier  and  redefines  the  traditional business models between large  companies  and  local  dairy  farmers  into  a  business‐to‐business partnership.    The  case  examines  the  challenges  and  opportunities  of  such  a partnership  in the context of a) additional  income generation for the poor, b) in  improving  the  standard  of  living  within  the  community,  as  well  as  c) becoming  an  innovative  model  for  doing  business  with  lower‐income households.  

 

CIMORY Dairy Products:Empowering Poor Dairy Farmers to Do a Sustainable Business

“As the local demand was too high, the state had the rights to impose policies on imported-

milk powder to enter into a local market meeting the unfulfilled

demand.”

Written by: Antonius Suhartomo

Yosef Manik T. K. Gan

Dian T. Siahaan

President University

Menara Rajawali 27th Floor

Jl. Mega Kuningan Lot#5.1

Kawasan Mega Kuningan

Jakarta, 12950

Phone: +62 21 576 0808

Fax: +62 21 576 1369

E-mail: indonesia.gcn@gmail.com

INDONESIA GLOBAL

COMPACT NETWORK

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1. Context: Improving Standard Nutrition of Young Generation Milk as we know is one of the most important sources of protein. Milk is a source of primary growth, muscle builder as well as a central supplier of the calcium needed for our bones and endoskeleton. In developed countries, especially in European countries and the United States of America, people have the habit of drinking milk everyday as a prime source of foundational nutrition. On the contrary, in Indonesia, the milk drinking habit has not well established. Though perceived to have abundant goodness however it is also seen as an expensive and unaffordable. Supporting the good value notion is the existence of a traditional drink called “air tajin”, essentially a milky, translucent run off from boiled rice. The level of milk consumption in Indonesia is 7 liters per capita per year, miniscule as compared to other countries of the world. Table 1.1 below shows milk consumption of selected countries.

Table 1.1 Milk and Milk Products Consumption in Various Countries, 2006 data.[1]

Country Milk Consumption

(Liters per capita per annum)

Finland 183.9

Sweden 145.5

Ireland 129.8

Netherlands 122.9

Norway 116.7

Spain (2005) 119.1

Switzerland 112.5

United Kingdom (2005) 111.2

Australia (2005) 106.3

Canada (2005) 94.7

European Union (25 countries) 92.6

Germany 92.3

France 92.2

New Zealand (2005) 90

United States 83.9

Austria 80.2

Italy 57.3

Mexico 40.7

Dairy milk industries in Indonesia prefer to use imported milk powders rather than fresh pasteurized milk as the source for production, mainly due to cost, convenience and perish ability issues. The largest milk consumption in Indonesia is in powder milk

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form, followed by sweetened condensed milk. These two products are also considered simpler and cheaper to manufacture, both technically and commercially.

Knowing the importance of fresh milk and its business potential, and at the same time recognizing a potentially important area for corporate social responsibility, Mr. Sutantio decided to build PT. Cisarua Montain Dairy in 2006. Seeing the opportunity of providing more of the food staple to fellow Indonesians, especially the weaker sections, he embarked on this venture to develop local capacity, build a better life, reduce poverty and improve community health, in Indonesia.

2. Macro Group and Cimory

MACRO Group is a holding company consisting of a number of subsidiaries with businesses in daily consumption products. While the primary goals are on quality and efficiency, all subsidiaries are aligned towards improving social living standards and lifestyles in their immediate and connected communities. The names of the subsidiaries are as follows:

2.1. PT Macrotama Binasantika (1989), trades food ingredients and

machineries. 2.2. PT. Macroprima Panganutama (1992), produces meat with Kanzier brand

for category premium sausages and iolite for product category nuggets and Rollado.

2.3. PT. Macrosentra Niagaboga (2005), distributes all manufactured product from Macro Group and lately became Cisarua Mountain Dairy Products

2.4. PT. Java Egg Specialties (JESS) (2008), produces liquid egg. The first company to produce liquid eggs in Indonesia.

2.5. PT. Cisarua Mountain Dairy, (2006), the focus of this case study, a producer dairy product with Cimory brand for premium pasteurized fresh milk and Cimory Yoghurt Drink. Not only selling its products through retailers, Cimory also has a restaurant in Cisarua. In order to accommodate the growing business, Cimory has also set a plan to establish a packaging factory in Cimory 2 in Cisarua. Both Cimory and JESS are joint venture between Macro Group and HOS BV, a Dutch company. This venture has full support from the Government of Netherlands.

3. An Outlook of Milk Industry in Indonesia As has been discussed in previous section, milk consumption in Indonesia is as low as 7 liters per person per year. This is very far below the average level of consumption in some selected countries depicted in Table 1.1.

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One of the most influencing factors that affect the fresh milk consumption is the state regulation in milk industry in Indonesia by instituting controls on local demand and supply. When local demand was high, the state had the right to impose policies on imported-milk powder to enter into a local market, meeting the unfulfilled demand. Similarly, while the local supply was higher than local demand, the state could legally enforce tariff and non-tariff

barriers to imported-milk powder stabilizing local market conditions.

The state enforcement of policy to influence local demand and supply has had its consequences, directly affecting local fresh milk producers. The major impact has been a decline of fresh milk demand in the market. Mainly due to the agreement between IMF and Indonesian government in 1998 that allows the freedom of powdered-milk producers to import milk-powder without linked to Bukti Serap (Busep). Foreign milk exporters also enjoy subsidies from their country of origin. By means of these subsidies received, imported-milk powder could compete with a price advantage against fresh milk. Import duty charged by Indonesian government is also quite low, which is only 5%. In addition, the fresh milk industry was also disadvantaged versus powdered milk in terms of publicity and promotion, thereby causing a loss to local fresh milk producers as the market switched from consuming fresh milk to imported-milk powder [2].

Fresh milk producers found further hindrances to compete against imported milk powder. In addition to the subsidies given by country of origin, it has also been a sort of battle between the organized and unorganized sector. Milk powder is marketed by large corporations thereby providing advantage of scale, offering economies in production, pricing, distribution, and as mentioned earlier, in advertising and promotion.

This in the long run helped to affect consumer’s perceptions about nutrition contained in imported-milk powder. These modified perceptions placed imported-milk powder as a superior product and left fresh milk behind as an inferior alternative with low nutrition. Consequently, local market for fresh milk shrunk, leaving fresh milk producers with smaller market shares.

4. Dairy Farmers Profile State regulation in milk industries and its consequences have had a negative impact on promoting the future potential of fresh milk, leaving the dairy farmer disadvantaged in terms of perceptions of quality of product as well as on price

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competitiveness. This has directly affected morale and optimism in many areas including Cisarua. A preference to use imported powder instead of fresh milk in end product manufacture has led to lower demand and therefore lower prices for fresh milk. This has prevented dairy farmers from acquiring adequate resources to meet investments to breed cows properly. Many dairy farmers, in areas like Cisarua today, have converted to become daily motor-cycle drivers after having sold their cows and livestock. Leaving them constrained within the realm of the poverty cycle. Many are in desperate need of not only funding, but interventions beyond direct funding, like opportunities for steady markets with remunerative prices.

5. Profile of Cimory: Vision Development

In the 1990s Mr. Sutantio – a graduate in food technology from Germany – used to spend his leisure time with his family in Cisarua, a suburb of Jakarta. During the weekends he interacted with the local people, most of whom were dairy farmers. Frequent conversations made him aware of the problems faced by the dairy farmers as well as the local milk cooperative, In that, a) Farmers found it difficult to sell their produce easily; b) Established factories preferred to use powder as raw material instead of fresh milk; c) Prices of fresh milk were inadequate to cover investment costs and deliver a reasonable profit margin; d) Most of the farmers could not get out of the poverty cycle and were resorting to selling their assets.

Combined with an acute sense of business, his philanthropist heart made him realize the following: i) He could create a market for the local dairy farmers thereby protecting and building local capacity; ii) He could play an important hand in poverty reduction in his area; and iii) Armed with the knowledge that pure fresh milk is in fact more nutritious and healthier than non-fortified milk powder, actually establish a double edged sword – in helping build a better life for the people around him at the back end, as well as providing more wholesome and nutritious milk at the front end to the consumption markets. As a result Mr. Sutantio set up a fresh milk factory at Cisarua.

His first strategy when starting the plant operation was to absorb the fresh milk from local farmers at a highly competitive price, so long as they could provide fresh milk at a premium quality. At that time, as the average market price of fresh milk from milk producers was Rp 2,000.- per liter. He decided to purchase the local milk for Rp 2,800.- per liter [2]. This was obviously a significant incentive for the dairy farmers and re-motivated them to continue in their livelihood, and improve their standard of living.

The second strategy was to re-modify perceptions and raise awareness of the superiority of fresh milk over milk powder. Starting locally through school children-factory-visits, promotional and educational films and other interventions, both locally and regionally. The strategy worked well and with success in educating and stimulating people to change their perception about fresh milk, and has attracted more and more people to consume fresh milk instead of powdered milk.

Until now Cimory has been able to run the factory with a capacity of 10 thousand liters per day, distributed within the Jabotabek (Jakarta – Bogor – Tangerang –

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Bekasi) area, a highly populated region (over 25 million) in Indonesia. This is a significant contribution for increasing nutrition standards on the regional scale. Although the milk consumption per capita is not significant yet, the awareness of drinking fresh milk is already awoken and a very effective model how a sustainable business can help to alleviate poverty of dairy farmers has also been exhibited.

6. The Evolution of Cimory Business Model

Initially Cimory faced a string of problems, the main one being quality of milk supplied. While offering a premium purchase price to dairy farmers, Cimory were unable to market their own product to end customers due to low quality. This was an extremely dangerous situation, both for the project as well as for the very future of the fresh milk product, including perceptions of quality and therefore nutrition value of fresh milk.

In the endeavor to find solutions, Mr. Sutantio discovered that there were 6 groups of grade applied to identify the quality of milk produced. This grade ranged from “A” (best quality) to “F” (worst quality). According to this grading system, Mr. Sutantio discovered that local milk quality only reached a maximum of grade D, which was far below market standards.

As it is, the lack of awareness of the real benefits of fresh milk consumption made its distribution very difficult. With the low quality being marketed, the difficulty to penetrate local markets became twice as much. As a solution, Mr. Sutantio took the following steps:

6.1 Removing constraints and providing incentives

(1) Mr. Sutantio conducted research to know more on how to run a dairy farm. He was helped by Dutch researchers to investigate methods on how to efficiently manage a dairy farm, including best practice to breed cows and maintain a clean and healthy environment. The importance of the latter was driven by the argument that a clean cage for every cow could increase milk production up to 20%. Mr. Sutantio in turn taught dairy farmers techniques to improve the quality of fresh milk to and increase yields. In some cases, dairy farmers were even provided with free equipment to help them improve efficiency and productivity.

(2) To improve product quality, Mr. Sutantio applied a grading system. All milk produced would be measured according to identified criteria, including bacterial levels, fat content, density and viscosity. Higher grades would attract higher prices from Cimory. By applying this method, Mr. Sutantio could group dairy farmers according to the grade achieved. Using this grouping system, he would end up with 6 different groups of dairy farmers and only accept milk with grade higher than D. The rest would be rejected.

(3) In addition, with the assistance of the Dutch researchers, Mr. Sutantio

successfully mentored dairy farmers to change their methods of cow

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breeding and farm management to enable higher yields and better quality. Regular coaching camps were organized to update farmers on current techniques being used in the West as well as proper care of animals to prevent diseases and illnesses.

(4) To increase market awareness, Mr. Sutantio applied methods to educate

consumers regarding the high nutrition contained in fresh milk. Mr. Sutantio collaborated with TV networks to launch TV shows targeted to children and mothers. Educational programs included shows on farming, process and production, as well as testimonials bearing witness to the real nutritional value of fresh milk and its importance for human health and well being.

6.2 Building Partnerships with The Poor as Individuals

Ever since Mr. Sutantio started his efforts to elevate dairy farmer’s welfare, he had already started grouping local dairy farmers to watch over one another with regards to quality control. Each group member had responsibility to improve milk quality of its group, and the authority to discipline those members with slow or no improvement. Besides exercising responsibility and authority, Mr. Sutantio trained local farmers as well to be a trainer of how to run and manage a dairy farm, how to breed high quality cows, and how to nurture newly-born calves.

6.3 Combine Resources and Capabilities with Others Despite the improvement being made hitherto, Mr. Sutantio kept working together with some foreign research fellows from all over the world to identify up-to date methods concerning dairy farm business. He also passed on his knowledge and ‘know how’ to local dairy farmers.

Furthermore, to activate the role of Village Unit Co-operative (KUD) Giri Tani, Mr. Sutantio worked in partnership with KUD to train local dairy farmers and to supply cow fodder or other needs to run a dairy farming business. Mr. Sutantio, bought all the milk produced from local farmers through KUD Giri Tani at premium prices. Thus, KUD Giri Tani played a role as a broker

to bridge transactions between Cimory and local dairy farmers.

By doing this, KUD formed a better partnership with local farmers. Supported by an improved economic environment, local farmers could pay their membership fee; arrange better payments for KUD Giri Tani which at the end enabled KUD to give soft loans to local farmers.

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6.4 Engage in Policy Dialogue with Government Mr. Sutantio is a head of dairy products department in Kamar Dagang Industri (Indonesian Chamber of Trade and Industry). He has been involved in formulating policies in regard to tariffs, free-tax regulations, distribution, import regulations and some other policies to help local dairy farmer’s growth and welfare. An example is an amount of loan is now available for dairy farmers, while originally, that was only available for beef cattle breeders.

6.5 School Programs Mr. Sutantio had long planned to launch a dairy to school program, to inform children, teachers and parents and urge them to consume fresh milk in preference to milk powder due to its superiority. The program would be underpinned by a cup-per-day-per-child initiative to meet the nutrient needs of poor children. This program was also a part of his dream to improve Indonesia’s children’s nutrition through a fresh milk campaign.

7. Social and Economical Impact

Ever since its establishment, Cimory has made a profound social and economical impact on society. This includes increasing nutrition standards of people on a regional scale, alleviating poverty and elevating dairy farmers’ livelihood, supporting the cooperative society (KUD Giri Tani) in Cisarua, other multiplier effects, and business model reproducibility.

7.1 Increasing the Nutrition Standard of the People in Regional Scale As described in the previous section of this report, milk consumption in Indonesia on an average is only 7 liters per capita per annum, which is far lower than minimum nutrition level recommended by WHO. Therefore educating people of the significant importance of fresh milk consumption is absolutely necessary. In this respect, the role of Cimory is to promote the consumption of fresh milk by raising the awareness and providing high quality fresh milk at an affordable price. Until now Cimory has been able to operate and to produce fresh milk up to 10 thousand liters per day, distributed within Jabotabek (Jakarta – Bogor – Tangerang – Bekasi) region, a highly populated area of Indonesia.

7.2 Elevating Livelihood and Eradicating Poverty of the Dairy Farmer Starting from its establishment, Cimory’s policy was to absorb the milk

produced by Cisarua’s dairy farmers at a highly competitive price. Before the existence of Cimory (in 2003 – 2005), milk price was an average of Rp 2,000.- per liter. In 2006, as Cimory started to operate, the milk price was increased up to Rp 2,800.- per liter. This 40% increase resulted in increasing farmers’ incomes and contributed to elevate their livelihood. Figure 7.1 shows the increasing of purchasing price from time to time from 2003 to 2008. Current milk price as bought from KUD Giri Tani at the moment is Rp 4,000.- [3].

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Fig. 7.1: Trend of milk prices (black dots indicate price before Cimory) [3]

The highly competitive price also attracts the villagers to do business in dairy farming. In the years before Cimory’s existence, many of the farmers decided to sell their cows and convert to other businesses, mainly motocap-drivers. There were 200 dairy farmers in 2003. In 2006 only 160 farmers were left. Later on as they have realized that becoming a dairy farmer is far more beneficial, they converted back to being a dairy farmer. In 2009 there are about 300 farmers in Cisarua doing business in dairy milk in cooperation with Cimory [3]. This fact exhibits how the existence of Cimory has been able to prevent the dairy farmers from poverty problems.

7.3 Multiplier Effects

Progressive pricing (higher prices for higher quality) stimulates dairy farmers to improve milk quality by increasing nutrition quality, thus milk price always increases from time to time and reached Rp 4.000,- in 2009 (increases by 80% compared to milk prices before Cimory started to operate) [3].

The highly competitive price stimulates dairy farmers to increase the quantity of milk produced. If the output was averagely 9 liters per day for each (cow) in the years before Cimory’s existence, nowadays it increases up to 14 liters per day for each and still with possibility of improvement [3].

Fig 7.2: Trend of milk production [3]

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Increasing of the number of the cows has been able to absorb the labor supply. Ideal number of worker and cows is 1:8. As the number of cows increase, more workers are needed to manage the cows. At the moment, there exist 1200 cows in Cisarua as captive milk suppliers for Cimory [3].

Cows’ manure has been utilized by vast majority of the farmers to produce biogas. This biogas is used for cooking purposes. The utilization of biogas from cows’ manure has been able to decrease their expenditure on cooking fuel (LPG) up to 50%. For families who used to consume 14 kg of LPG in a month, by simultaneous application with biogas, the same amount of LPG is sufficient for 2 months consumption.

7.4 Business’ Reproducibility

While Indonesia is still struggling with low fresh milk consumption, Cimory’s remarkable success has made it obvious that opportunities in doing similar businesses are still promising. At present, requests from different quarters of Indonesia to copy this business model have been proposed to the owner of Cimory, which is yet another indicator, and evidence of the reproducibility of this business.

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REFERENCES 1. International Dairy Federation, Bulletin 423/2007 2. Interviews with Bambang Sutianto, Director of Cimory. (Mar – Aug, 2009) 3. Interviews with Herry, Officer of Village Unit Co-operative (KUD) Giri Tani. (Mar –

Aug, 2009)

Profile of Case Writers

Antonius Suhartomo

In 1975 – 1977, Antonius Suhartomo received training courses in Radio Transmission of Microwave Terrestrial and Satellite from PT. Telekomunikasi Indonesia (TELKOM), and from 1977 – 2004 Antonius was an employee of PT. TELKOM. He received a B.S in Physics from University of North Sumatera, Medan – Indonesia in 1984, followed by a Master (M.Eng.Sc.) in Engineering Faculty majoring in Optical-Electronic and Laser Applications from University of Indonesia, Jakarta – Indonesia in 1993. He also received a Master (M.M.) in Management from Graduate School of Management, Institute Management

Telkom (IMT), Bandung – Indonesia in 1994. At PT. TELKOM from 1977 – 2004, he was assigned in many departments under TELKOM business such as in Engineering Division, Training Division, Research & Development Center (RDC), Institute of Technology Telkom (ITT), and Maintenance Service Center (MSC) before he took his Ph.D. He received his Ph.D. in Electrical and Computer Engineering (ECE) Department majoring in Electrical Engineering from Stevens Institute of Technology, Hoboken – NJ, USA in 2007. He is currently in-charge in several positions such as Engineering Lecturer, Secretary Department of Electrical Engineering, and Head of Research and Development Center at President University Kota Jababeka – Cikarang, Bekasi – Indonesia starting from year 2008.

Yosef Manik

Yosef Manik holds M.Sc degree in Sustainable Processing from University of Karlsruhe (TH), Germany. Currently, he is a faculty member in the Faculty of Engineering, President University in Cikarang. Engineering Sustainability topic, which he has published several papers in, is one of his research interest.

T. K. Gan

Mr. GAN Thay Kong is giving the courses for Leadership and Personal Development, Entrepreneurship, Project Management and Supply Chain Management in Extension Lecturing Classes at President University. Mr. Gan holds a Diplom-Kaufmann Degree (Dipl.-Kfm) from Freie Universitaet Berlin and a Diplom-Wirtschaftsingenieur Degree (Dipl.-Wirt.ing) from Fachhochschule fuer Tecknik Mannheim, both in Germany. Mr. GAN is also interested in the topic of renewable energy and wrote a book: Peran biomassa bagi energi terbarukan (the contribution of biomass for renewable energy), published by Gramedia. Prior to

entering President University, he was working as a manager for textile dyeing and finishing at a textile company. He also marketed coal fired steam boilers and gave compact course for boiler maintenance at a private power plan (30 MW) in Bandung, Indonesia.

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Dian T. Siahaan

Dian T. Siahaan was born on 30th April 1973, in Jakarta from a marine family. Brought up in a high-disciplined military style, she graduated in Management from Universitas Kristen Indonesia in 1995. After 6 months from the graduation day, she flew to the Netherlands, to study International Business in Rijksuniversiteit Groningen. She successfully completed her master’s degree in 1996. She had been teaching and conducting research projects since then. Her research area covers small business management and entrepreneurship. She had worked in President University, leading an Education and Training Department under Research Centre and was chosen as Secretary of Management Department at the same time. Right

from there, she continued pursuing her career in Universitas Bina Nusantara, as a Research Coordinator. She still continues conducting research and following any research competitions until now.

Profile of Institutions

President University

The conceptual plan of President University was first in September 1997 by Mr. S. D. Darmono, the President Director of PT Jababeka Tbk. and Prof. Donald W. Watts, who was the President of Bond University, Queensland and Vice Chancellor of Curtin University, Western Australia. The goal of their proposed University was to create an institution of learning which would prepare future leaders of industry and society by giving them the skills and experience necessary to excel upon graduation. The university officially began in 2001, offering a Bachelor

of Engineering degree. At that time, the institution was called the School of Engineering based in Cikarang, Bekasi. On 16 April 2004, the Ministry of Education granted President University official status as a full fledged university. Although still a young University, President University is growing at a tremendous rate every year. There are now around a thousand students attending President University from Indonesia as well as many other countries. PU has expanded its course offerings and now offers 12 different majors in subjects ranging from Industrial Engineering to Public Relations.

Cimory

In the 1990s Mr. Sutantio – a graduate in food technology from Germany – used to spend his leisure time with his family in Cisarua, a suburb of Jakarta. During the weekends he interacted with the local people, most of whom were dairy farmers. Frequent conversations made him aware of the problems faced by the dairy farmers as well as the local milk cooperative, In

that, a) Farmers found it difficult to sell their produce easily; b) Established factories preferred to use powder as raw material instead of fresh milk; c) Prices of fresh milk were inadequate to cover investment costs and deliver a reasonable profit margin; d) Most of the farmers could not get out of the poverty cycle and were resorting to selling their assets. Combined with an acute sense of business, his philanthropist heart made him realize the following: i) He could create a market for the local dairy farmers thereby protecting and building local capacity; ii) He could play an important hand in poverty reduction in his area; and iii) Armed with the knowledge that pure fresh milk is in fact more nutritious and healthier than non-fortified milk powder, actually establish a double edged sword – in helping build a better life for the people around him at the back end, as well as providing more wholesome and nutritious milk at the front end to the consumption markets. As a result Mr. Sutantio set up a fresh milk factory at Cisarua.