29 May - 28 July, 2000


E-mail conference on
"Small Scale Milk Collection and Processing
in Developing Countries"

Discussion Paper 3.2: Organisation and Management of Milk Producer Organisations







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Discussion Paper 3.2: Organisation and Management of Milk Producer Organisations

By: J. Phelan, International Consultant on Livestock Food Systems and Rural Development

Organisational Aspects

Informal collaboration between milk producers in production enhancement, processing and marketing, has been practiced by milk producers for centuries but the emergence of formal milk producers' groups has only happened in the last hundred years in the west and more recently in most developing countries. The type of association varies considerably with country and ranges from informal groups and partnerships, through formal democratic co-operatives structures, to so called national co-operatives, which are controlled by governments. The term co-operative means different things in different regions but there has been a gradual evolution towards democratic structures in most countries. The formation of groups of milk producers has progressed more rapidly in developed economies where governments have limited themselves largely to providing supportive legislation, and selective tax concessions in the fledgling stages, as part of an enabling environment for development of producers' organisations.



In the emerging economic trends towards liberalisation, privatisation, and market orientation, the governments in many developing countries are reducing their direct involvement in assistance to agriculture and people are being given more responsibility for their own development.  In future there will be greater emphasis on self-help groups and a participatory approach to development in order to mobilise local resources and knowledge for the benefit of rural communities. This environment will be much more conducive to the formation of bottom up producer organisations but  it is important that the institutional and legal frameworks and modus operandi for these groups are based on the successful experiences of similar groups elsewhere in the same country or in other countries. 

Dairy farmers experience common problems and have similar interests. They therefore tend to form groups for the purposes of : Exchange of experiences; Training;   Savings and credit schemes; Veterinary and other service delivery and drugs; and Marketing of milk. The basic unit in any form of joint activity is the group and  working in groups confers many advantages but it does involve commitment and obligations. The degree of formality needed in the structure of groups, varies with function and stage of development of the joint activity. Informal groups tend to become more formal as the numbers and geographical cover increases. 

Milk Producers should be encouraged to build their own groups from the bottom up through a participatory approach and should adopt constitutions which preclude dominance of the group's activities by a few. The initial steps in the formation of a group are critical to establish the necessary trust and cohesion. In the beginning the farmers may prefer to work together in some informal or loose association to solve common problems and become convinced of the benefits of joint activity. In general there is a greater chance of success when an integrated approach is adopted to address production, as well as marketing, processing, management and credit issues. The most important thing is that the members agree on the modus operandi and the objectives and that these are fully explained in a written document to which the members have access. This is achieved through a series of meetings, election of an Advisory Task Force, with responsibility for assembling and analysing all the relevant information through baseline surveys, marketing and feasibility studies. The use of planing techniques such as  SWOT (Strengths- Weaknesses- Opportunities- Threats) and Logical Framework(LFA) analysis, and calculation of Break even point can be helpful at this stage.

The Advisory task force should consist of not more than seven people. It is important that they have a complementary range of qualifications and abilities and share a strong commitment and dedication to the task entrusted to them. The task force has the responsibility to fully investigate the proposal to establish an MPO and advise the potential members of the advantages and obligations involved. The following terms of reference are suggested:

  1. Clearly describe the problem to be tackled and quantify its extent 
  2. Develop proposals for solving the problem
  3. Recommend the type of organisation,- listing advantages and obligations, government regulations and concessions.
  4. Specify the resources needed to implement the proposals - cost of purchase or hire of buildings, facilities and equipment.
  5. Quantify the human resource requirements and the likely source of personnel - what additional skills can be developed within the group through training, and what staff must he hired ?.
  6. Suggest procedures for management of the MPO in the formative years. 
  7. Estimate the minimum number of members and the minimum volume of business needed to make the venture viable. Advise on promotion campaigns to attract the required number of members and expand business. 
  8. Develop or commission a 2-3 year financial plan to establish the financing needs of the venture and indicate the likely proportions coming from members, grants, loans from development agencies or financial institutions.

The Task Force should liaise with the appropriate national organisations and development agencies to seek advice and assistance in carrying out these terms of reference. When their task is completed, the report is presented to a public meeting of all stakeholders. This meeting would elect a Provisional Committee of Management  with responsibility to set up the MPO and proceed with establishing it as a legal entity.  It may or may not include members of the Task Force. It must carry out a final appraisal of the whole proposal and agree on objectives, policies, finances, organisation and management of the MPO. Further studies on particular aspects may be carried out at this stage if deemed necessary. It must also decide on external and internal communications and on member education. The Provisional Management Committee must choose the appropriate form of organisation and adopt appropriate legal statutes. It is the responsibility of the Provisional Management Committee to ensure that the rules adopted are appropriate to the needs of the organisation. The rules must address the aims, objectives and activities, internal regulation of the organisation, and provide for modification or rescinding of any or all the rules.

Once the draft rules are agreed, the formal registration can proceed. The details will vary according to the arrangements in the particular country but there are basic steps, which are common. These involve the submission of a completed application form to a national authority, together with copies of the constitution, registration forms for founder members, evidence of paid up capital and payment of a prescribed fee. This is followed by formal approval, and acknowledgement by the registrar.  The national organising bodies usually provide the model rules and a registration assistance package, for a set fee, which also covers registration. 

When the Provisional Committee of Management has registered the milk producers' organisation or society and received a number of completed application forms, it should proceed with the first General Meeting of Members to inaugurate the group enterprise. The Provisional committee must report on the tasks entrusted to it by the meeting of prospective members and tender its resignation. The members are then in a position to exercise their rights according to the rules of association, since the members in general meetings are the supreme authority in the affairs of the society. In practice most of the authority is delegated to the Board of Directors, who in turn may devolve that authority to managers and office holders. However, the board is still responsible to the members. 

Managing a Milk Producers' Organisation

Management Structures and Organisational Development

The inaugral meeting of members, elected a Board of Directors and delegated to them the responsibility of running the organisation between delegate meetings. Group members of a Milk Producers' Organisation will be positively disposed towards the organisation only if it continues to create benefits for them. An MPO must therefore be structured and managed so as to provide members with the best cost-benefit package of markets and services available in their area and make economic provisions for the future of the organisation. Successful management of group enterprises is linked with promotion of a participatory approach to involve members in the affairs of the organisation. The members need to take an active part in shaping and implementing the policies of the organisation but since many of them may not have the required skills and knowledge to do this effectively, training must be provided to encourage participation and develop leadership qualities within the group.

The management structure will depend on the size and complexity of the enterprise but there are basic elements, which are common to all enterprises.  The members elect a Board, which appoints a Manager and agree on initial Staffing levels. In more complex enterprises there may be a two - tier system, involving a Supervisory Board to safeguard members' interests. The main duties of the Board is to give effect to the proposals, contained in the report of the Provisional Committee of Management, and endorsed by the first General Meeting of members. While delegating management to their elected and appointed leaders, members need to provide clear objectives and take an active part in the shared decision making processes associated with the wider development issues involved in the overall development of the group. 

The business management in a very small MPO may be carried out by an unpaid, elected member. As the enterprise grows, a management team must be formed, which includes the Board of Directors and salaried professional management staff. While members retain ultimate governance, most of the work of controlling should be in the hands of the elected leaders, who in turn should rely on appointed managers. The latter are responsible for the day to day business management, specified in the business or operational plan, This plan is essentially a set of guidelines for running the enterprise and its complexity will depend on the range of activities envisaged. The plan consists of a set of targets related to the group's objectives with assigned responsibilities for each activity. It must set out clearly what is to be done, by whom, when and how. In the initial stages of development of an MPO, the responsibility for implementation of the business plan may be in the hands of members and leaders, but as the MPO grows, it will be necessary to engage professional management and technical staff. 

A synergistic interaction is needed between the members, the board and the manager in order to shape a suitable management ethos for the group enterprise. The selection of leaders and managers is therefore critical in ensuring success. It is important that the roles of all parties are clearly defined and understood and for this reason it necessary to write down and agree on the job descriptions or function statements of all concerned. 

Function of the Board of Directors

The overall function of the Board is to monitor and control the operational plans to ensure conformity with the policies, strategies and interests of members. However, details will vary depending on the form of association as well as the size and complexity of the enterprise.  The initial duties will include: 

  • Appointing a Chairperson for the Group, unless this has appointment has been made by the General Meeting of members. The Chairperson must preside over meetings of the members and of the Board to obtain decisions and must be familiar with every aspect of the groups activities.
  • Appointing the Secretary whose duties include understanding and advising on the statutes of the group, keeping records of share transactions, circulating timely notice of meetings and keeping minutes of meetings. 
  • Translatin0g the objectives and policies of the group into specific goals and developing a system of monitoring progress towards those goals. 
  • Selecting and appointing a manager and the delegation to him/her of appropriate responsibilities and sufficient authority to function effectively.
  • Selecting and purchasing or renting, suitable premises and equipment to carry out the group's activities as planned.
  • Adopting a financial policy to provide the fixed asset and working capital, and suitable financial and management accounting systems to monitor and control activities.
  • Developing and implementing a communications policy to ensure that members are kept fully informed and involved in the affairs of the group. 
  • Promoting education and training programmes for members, staff, managers and directors as this is essential for organisational development.
  • Promoting co-operation with other groups involved in related activities and exploring the advantages of inter group associations and second- level organisations or federations in improving bargaining power in purchase inputs, marketing, or representations to governments. 

In order to carry out these functions effectively, the Board should have a programme of activities at regular intervals and a monitored plan covering specific periods (normally one year). The agenda of the routine monthly meetings of the Board should include an update on membership, and reviews of performance relative to predictions and the financial situation. The following twelve items have been suggested for inclusion in the annual plan for the Board of a Co-operative, but these would equally apply to an MPO, which was not a co-operative.
1.Review of vision statement:.  2. Review of objectives and members' benefits.  3. Update of strategic plan. 4. Establishment of annual budget. 5. In-depth review of results against budget and the strategic plan.  6. Review of corporate policies. 7. Review of remuneration policy. 8. Review of performance of top management.  9. Review of performance of Board. 10. Visits to operating facilities - familiarisation rather than supervisory. 11. In-depth reviews of key areas of activity - reports by manager and senior staff.  12.  Review of human resource development - members, directors and staff.

Staff Recruitment

There are subtle differences in the requirements for general managers or chief executive officers of MPOs because group based organisations are more people oriented than purely commercial companies. However, there are no differences in the essential tasks of entrepreneurial management between the two environments and both recruit from the same labour pool. The relationship between manager and Board is critical to the success of the organisation and the importance of selecting the right candidate cannot be over emphasised.  Senior managers must combine management skills, leadership and organisational abilities, with a good understanding of the nature of the business and the priorities of the owner members. The Board must clearly define the functions of the manager relative to their own responsibilities  and must give the incumbent sufficient authority to create a working environment which will both challenge and stimulate staff.  After selection the manager should be given appropriate induction training to get to know the Board and the business and there should be a probation period and preferably a fixed term contract. Rewards should reflect progress in matching the member objectives. 

The senior manager will be responsible for setting up the mechanism to select and appoint all staff below the level of those reporting directly to the Board. Guidelines on staffing levels are usually set by the delegate meeting. The Board may retain control over wage and salary scales, promotion policies and health and safety issues or insist on consultation prior to introduction of significant changes in these areas of employment policy. If members of the MPO work for the group, their status as a worker will depend on the form of association chosen by the group. If they have formed a partnership, then all  the workers, who are partners, will be regarded as self-employed for legal and taxation purposes. In a partnership each partner takes  weekly or monthly drawings from the partnership bank account which are set against their profits at the end of the financial year. Partners are not protected by employment legislation and will not receive state benefits. The rights of each worker/partner should be set out in the partnership agreement and if they wish to enjoy similar rights to those of the employees, they must make the necessary provisions in their partnership agreement. If the group has registered as an Industrial or Provident Society, or as a Company, then the workers will be employees and the fact that they own or control the employer does not affect their legal status as employees.  Each employee should have a written contract of employment setting out the terms and conditions of employment and this helps to balance the rights and duties of a worker against the interests of the milk producers' group. The conditions governing employment are covered by state legislation in most countries but in addition there are conditions governing workers shares in co-operatives in some countries. 

There are no special conditions applying to employees in MPOs, so standard procedures and techniques are used to select, appoint, evaluate and reward performance. Each position must be specified through a job description and the appointee must have the necessary technical skills and personal qulities to take on the responsibility. Training on the job must also be provided where needed as part of the overall human resource development programme for the organisation. 

Accounting Systems 

Up to date and accurate information to support decision making is the key to successful management of any enterprise. The keeping of proper records of all business transactions in an MPO is essential to meet internal needs and external obligations and to overcome problems. The group must have information on cash flow, the amounts they owe and are owed and by whom, what stocks and equipment are on premises, what products or services are making a profit or loss, and any indication of likely emergencies such as cash flow problems.  The external factors relate to, legal requirements for keeping adequate records, to provide information to lending institutions and to State agencies and revenue Commissioners.  The FAO Trainer's Manual on Agricultural Co-operative Development, states two fundamental rules which apply to all systems of record keeping, even the simplest (FAO,1998). 

- Responsibility for keeping records must be firmly assigned
- All transactions must have some verification (voucher or signature)

The basic books which the group should keep are: a) Receipts and Payments Book, b) Sales Ledger, c) Purchases Ledger, d) Petty Cash Book, e). Wages and Salaries Book and f) Fixed Asset Inventory. Other books and records are added as deemed necessary and pre-printed account books can be obtained from stationery shops or the group may wish to have ones printed with the name and logo of the group. The above records relate mostly to financial management and additional records and tools to refine operational management will be included under Milk Plant Management and Quality Control. 

Organisation of Milk Collection Routes and Centres

The baseline study will provide the information base for planning the collection routes and deciding on the type of facilities to be provided. A decision will have to be taken on the number of collection points and/or centres that are needed in the area covered by the group. The number will also be influenced by the type of processing, and/or marketing envisaged. Suppliers may be required to transport their milk to intermediate points or to the centres, once or twice per day at agreed times. It may be appropriate to organise group transport of individual supplies in containers provided by the farmer or alternatively the centre may provide and clean standard milk churns to improve hygiene in handling. 

The emphasis must be on hygienic production and handling and the movement of the milk as quickly as possible to the point where cooling or processing takes place.  The challenge is to cool or process milk during the 3-4 hour period after milking, when the natural bactericidal properties of milk, are preventing growth of micro-organisms. The importance of milk quality cannot be over emphasized as it governs the quality and shelf-life of the dairy products derived from it. The layout of routes must be planned to minimize holding time and temperature rise during transport. The management must stress the collective responsibility of group members in conforming to agreed schedules for collection to avoid undue delays and consequent deterioration of milk quality.

The manner in which milk is used varies with circumstances and location relative to the markets. An effective collection system provides rural milk producers with access to the rapidly growing urban markets for milk and milk products. The distance, from which these markets can be reached, varies with the product, the level of organisation and the transport infrastructure in the country.

The basis on which milk is paid for by the group, and the frequency of payment will be influenced by the arrangements for disposal of the milk. The actual price paid  to producers, must reflect the reality of the market place and the overall processing and marketing costs incurred by the group enterprise.

Dairy Plant Management 

Milk Producers' Organisations may limit their activities at the beginning to collection of milk and wholesaling it to a processor but most MPOs establish a milk processing facility at some stage to improve returns from the market. When a group enterprise such as setting up a milk processing plant is envisaged, it is necessary to analyze the situation in a thorough and professional way to give a clear understanding of the project and to get members to share a common ownership of the project. The same participatory planning, outlined in section 2, must be applied and the techniques such as LFA and SWOT analysis and other planning tools should be used. 

Plant Design and Operation

Management of a Dairy Plant involves identifying the right product mix, efficient processing, transport and distribution of milk and products and control of quality from primary production to the final marketing. Since milk processing is the core activity of the group, it is important to explore techniques in planning, monitoring and control which improve efficiency and enhance profitability. 

The essential features of an efficient Dairy Plant are: well designed equipment and premises, operated and maintained by well trained and motivated staff, where each task is clearly described and properly monitored. Milk is an excellent food for man and micro-organisms but it is also highly perishable and potentially harmful to man. Because of economic and health reasons, milk and milk products should be handled, transported, processed and packaged under the most hygienic conditions possible. In addition every step in the chain from cow to consumption, should be rigorously controlled to ensure correct processing and prevent post-processing contamination, which is the most frequent cause of problems. The importance of hygiene in dairy processing cannot be over emphasised and special attention should be given to cleaning and sanitation when preparing instructions for process operators. 

Milk Plant Hygiene

Milk hygiene implies good quality raw milk being handled by  workers observing good personal hygiene, using properly cleaned and sanitised equipment, working in clean premises. It is important for plant operators to appreciate the difference between the cleaning and sanitation processes. Cleaning involves the physical removal of all traces of milk solids from the milk contact surfaces through a cycle of pre-rinsing, scrubbing action with detergent and final rinse with clean water. Sanitation is the final step in the treatment using heat or chemical agents to sterilise the plant immediately preceding the next cycle of use. The two are related because it is difficult, if not impossible, to sanitise or sterilise equipment that is not properly cleaned. The key factors in efficient plant hygiene are:

  • Hygienic design of plant and premises
  • Selection of suitable staff and providing training,supervision, and recognition
  • Selecting the right detergent for the type of deposits, water type, and the equipment
  • Balance between chemical agents and heat in the sterilisation cycle
  • Effective monitoring of cleaned surfaces and concentration of chemical solutions 
  • Well designed cleaning and sanitising routines, with clear instructions for staff

The planning of cleaning and sanitising procedures should involve discussion between the plant manager, detergent /sanitiser and equipment suppliers, processing and laboratory staff. Feed back discussion on results by the laboratory control group to cleaning staff is very important. Separate routines should be developed for each processing operation and operators should be thoroughly trained. Particular attention should be paid to safety aspects in relation to high temperatures or steam pressure as well as handling chemicals.

Plant Operation and Maintenance

The efficient functioning of a dairy processing plant is a key factor in the success of an MPO. Staff must have the appropriate level of skills and understanding of the processes to optimise manufacturing procedures and equipment must be properly maintained to minimize downtime. The latter aspect is becoming increasingly important as processing units handle greater quantities of milk and become more mechanised. When new plant is purchased, it is important to make arrangements for the training of the staff who will operate the equipment and to have operating and maintenance manuals for each item of equipment in a secure but accessible place. It is advisable to build in a provision for staff training at commissioning and where possible, arrange training visits to other plants where similar equipment is currently in use.

Manufacturers' Manuals must be supplemented by in-service training and precise operating instructions and maintenance schedules for each item of equipment. These instructions must be in an appropriate format to be understood by all staff responsible for operating the equipment. The staff must also be informed about the key factors, which influence the economic efficiency of the process and the corresponding control points, must be monitored. The main inputs into each processing unit (materials, labour, and energy), must be accurately measured and recorded at regular intervals, and compared with actual and predicted outputs over the same time intervals. In a milk processing unit, this in effect means a mass balance on milk solids purchased and sold on a daily basis, and a comparison between the actual and theoretical amounts of labour, energy and packaging materials used per unit volume of milk or milk product.

The systems necessary for detailed measurement, compositional analysis, calculations and recording at the sub-unit level, must be put in place as part of the planning and management process. The theoretical yields of different dairy products can be calculated from a given quantity of milk of known composition by assuming certain losses at each step of the process and assuming order figures for the amount of labour, energy, cleaning and packaging material per unit of output. However, the target levels must be realistic for the equipment used in the plant and the length of each process cycle.  There are substantial differences between the skimming efficiency of separators resulting in different losses of fat in skim milk. The fat losses in buttermilk during churning of butter vary considerably with the churn type and size. Design of cheese vats significantly affect the amount of fat lost in whey. A new system for pasteurisation of milk in pouches, developed in South Africa and described by B. Dugdill in this E-mail Conference, minimizes losses of milk and allows very small quantities of milk to be processed. Energy requirements for heating milk can be dramaticall y reduced through use plate heat exchangers with regeneration sections. Short process cycles translate into higher than average milk solids losses in cleaning and a greater proportion of total energy and labour being used in start up and cleaning cycles. It is important, therefore to select the appropriate size of processing plant for the projected milk supply. All these factors influence the yield of product from a given quantity of raw milk and the amount of energy used in processing and should be taken into account at all stages of planning and implementation of the project. The targets set must be adjusted according to the equipment used in the plant, as setting unrealistic yield targets can demoralize staff. In some cases investment in new equipment may be justified on the basis of improved yields or reduced energy use in addition to labour efficiency considerations. 

Equipment malfunction and breakdown can have a significant influence on costs through downtime and product rejection. Preventive maintenance and quality control programmes are essential in a milk plant. Appropriate records must be kept and the staff responsible in both areas must liaise actively with processing and management staff to ensure that recommendations are acted on.

A complete set of record forms should be developed for each process, along the lines of the examples given for accounting systems, and this will facilitate efficient management of the plant operations. The process, accounting and auditing records are supplemented by a well planned  and properly recorded inventory and stock control system to provide a comprehensive information base for management decisions.

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