Operations Management Analysis of Fonterra

This report analyses Fonterra's operations, quality and risk management. It discusses their environmental, diversity and inclusion, and ethical behavior policies. It identifies and critically assesses four risk factors that impact Fonterra's operations and examines two strategies that Fonterra is employing to manage its operational risks. The report also discusses the probability and potential impact of operational risks on Fonterra's operational objectives.

Running head: OPERATIONS MANAGEMENT
Operations Management
[Fonterra]
Name of the student:
Name of the university:
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1OPERATIONS MANAGEMENT
Executive summary
The main purpose of this report is to analyse the business of Fonterra. The report finds that
Fonterra has been effective with taking preventive measures such as it did to recall ‘WPC80’.
However, it faces a few challenges, which are being mentioned in this report. Those few
challenges as identified in this report is high on severity level. Hence, there is a need for Fonterra
to take quick actions to prevent risks from happening.

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Table of Contents
1:- Introduction................................................................................................................................3
1.1:- Background information.....................................................................................................3
2:- (Task1): Analyze Fonterra’s operation......................................................................................4
Environmental policy...................................................................................................................5
Diversity and Inclusion Policy.....................................................................................................9
Ethical Behavior Policy.............................................................................................................10
3:- (Task 2): Identify and critically assess at least four risk factors that impact Fonterra’s
operations and critically examine at least two strategies that Fonterra is employing to manage its
operational risks.............................................................................................................................12
Four risk factors.........................................................................................................................12
Solution......................................................................................................................................13
4:- (Task3) probability and potential impact of operational risks on Fonterra’s operational
objectives.......................................................................................................................................14
5:- Conclusion................................................................................................................................18
References......................................................................................................................................19

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1:- Introduction
Fonterra based in New Zealand is the world’s largest exporter of dairy ingredients and
products. It generally uses milk produced by local farmers who work in collaboration with dairy
companies. These farmers are either the suppliers or the shareholders of Fonterra. Such a policy
of working with farmers itself indicates that Fonterra gives a high importance to approaches
towards a sustainable business. As far as food safety and standards are concerned, there is no
match to Fonterra and New Zealand in the whole world. Each of the segment of Fonterra’s
operations are of high standard. Fonterra leads the global dairy industry in terms of food quality
programs, dairy manufacturing operations and testing regimes. Each year Fonterra is able to
produce approximately around 2.4 million metric tons of dairy specific products. Fonterra takes
every matter related to food quality, safety and standard on a serious note (Fonterra.com, 2018).
The main purpose of this report is to identify operations, quality and risk management at
Fonterra.
1.1:- Background information
This segment of the report describes Fonterra’s proven strategy towards risk
management. It discusses a precautionary recall being made by Fonterra after identifying the
presence of not so hazardous substance ‘Clostridia’ in ‘Whey Protein Concentrate WPC80’
(Fonterra.com, 2018). Although, Fonterra produces ‘WPC80’ in lower volumes on comparing
with milk powder, it still is an essential ingredient. It is because ‘WPC80’ is a base ingredient to
manufacture many dairy products. Many products from sports drinks and infant formula to
yoghurts do consider ‘WPC80’ as a base ingredient (Foote, Joy & Death, 2015). ‘Clostridia’ that
was suspected as being present in ‘WPC80’, was in low numbers. A high number of ‘Clostridia’
could have been a threat to food safety. In case of Fonterra, the presence of ‘Clostridia’ was less

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hazard; still the company did not ignore it and rather announced a precautionary recall of the
ingredient. Of seven types of Clostridium botulinum, three types can cause a serious harm to the
food safety; however, those three types have never been detected in the exported dairy
ingredients and consumer dairy products from New Zealand (Lyons et al., 2016). The basis of
the recall was a suspected presence of Clostridia in ‘WPC80’, which eventually proved to be a
false alarm. However, the recall process of Fonterra was both global and complex. In addition,
‘WPC80’ is a hugely used ingredient in the making of many dairy products. It all created a major
food safety concerns in various parts of world.
The entire process indicates that taking preventive measures and showing proactivity
towards a potential threat is part of Fonterra’s operation. The company did not just make quality
dairy ingredients and products, but also take the responsibility of providing safest products
(Fonterra.com, 2018).
Quality is one of the core characteristics of Fonterra’s operations. The company ensure a
quality production by working closely with farmers who are mostly their suppliers and
shareholders. Apart from the production, they also closely monitor the testing of products to
ensure that no potential harms and threats are done to products (Fonterra.com, 2018).
Risk management is another core feature of operations as it is evident from Fonterra’s
precautionary recalls of ‘WPC80’ ingredient. The process though had followed a complex
process; it still contributes to the betterment of humanity, society and the world. It created an
alarming signal for others in various other parts of world to be preventive and careful towards
adapting the safety measures (Fonterra.com, 2018).
2:- (Task1): Analyze Fonterra’s operation
Management policies of Fonterra (Rijswijk & Brazendale, 2017):

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 Environmental Policy
 Diversity and Inclusion Policy
 Ethical Behavior Policy
Environmental policy
About
Environmental policies are about taking care of various divisions of operations with
effective measures to ensure a sustainable operation. The best thing about Fonterra’s is that it is
practically involved in each of the policy making. They ensure that milk is collected from natural
resources and that it does not have any harmful or hazardous substances within it. It does so by
working closely with farmers. This is done so to ensure that there are no negative impacts of
operations on the environment. Its farmers mainly are there suppliers and shareholders. In this
way, Fonterra is practically involved in the entire process from working with farmers to
acquisition of raw materials. Hence, the entire operation is well monitored with feasible
strategies. Raw materials are naturally grown leading to a minimal impact over the environment
(Sneddon et al., 2015).
Fonterra’s sustainable operations is not just limited to ensuring the collection of milk
from natural resources but is also expanded to ensuring less energy emission from its
manufacturing plants. To fulfill the mission, Fonterra uses modern and emerging technologies to
ensure that local climate remains minimally disturbed from the manufacturing. They closely
monitor the environmental impacts of manufacturing on biodiversity and freshwater quality. It
also means that they prefer using the water safely and investing in practices to ensure water
treatment processes. In the year 2017, Fonterra was able to reduce its contribution into energy

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emission by 1.2% from the last year. The consumption of water is 2.1% lower than the last year
(Fonterra.com, 2018). Fonterra is aimed to achieve a net zero emission by 2050.
Fonterra has its operations at the global level with New Zealand and Australia occupying
the maximum of operations. It is very difficult to ensure and fulfill the utmost efforts that
Fonterra put on operations in New Zealand. Additionally, it is also challenging to ensure quality
operations with minimal contribution to biodiversity, water pollution and energy emission. Water
consumption is the other feat, which Fonterra strives to achieve. However, it does so by
effectively managing its policies at the global level. Fonterra has designed a global operating
framework to safeguard its global operations and ensure less energy emission. The global
framework constitute the global group policies, which takes care of water consumption, energy
emission, environmental impacts and others (Jiang & Sharp, 2015). To implement the framework
successfully, Fonterra ensures that every site has a manager who is involved in operations and
follow necessary steps to ensure a quality production with a gradually decreasing impact on the
environment. Additionally, these managers are encouraged and motivated for working towards
attaining an ISO14001:2015 certification across the global manufacturing footprint of Fonterra
(Parminter, Duker & Hughes, 2016).
Fonterra does also effectively manages its supply chain operations. In the different
logistics modes, Fonterra is keen on reducing its carbon footprint. On roadways, tankers are
generally used to supply raw materials to manufacturing sites. Fonterra uses tankers only those
that are high in innovation and technology. For example, all tankers are already at Euro V level.
These tankers also have the semi-automatic gearboxes. Coda, which is the partnering business
for supporting logistics movement on roads, also opened a latest intermodal freight hub in
Auckland. This is one of the largest in New Zealand (Peterson & Prichard, 2015). Ocean

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shipping and rails are the means of logistics movement in Fonterra. Fonterra with its effective
management capabilities was able to reduce its energy emission considerably from the last year.
Below table shows the comparison (Peterson & Prichard, 2015):
GHG Emissions Source FY16(tCO2 -e) FY17(tCO2 -e)
Milk Tankers in New Zealand 133,093 133,371
Road and Rail Transport in
New Zealand
23,590 20,070
Ocean Shipping 141,733 138,622
Air Travel 9,049 9,606
TOTAL 174,372 168,298
Table 1: Logistics emissions
(Source: Fonterra.com, 2018)
Reason
Reasons are very clear that Fonterra is committed to offer products and ingredients,
which are best from both quality and safety perspectives. It is also that Fonterra is always into
process to reduce its negative environmental impacts. As opined by Sargeant & Paine, (2015), to
attain a sustainable business, it is important that business meets the quality parameters of
manufacturing, reduces its environmental impact and consumes less water. Fonterra ensures that
it is regularly into process to reduce energy emissions from its manufacturing plants both in New
Zealand and from its plants in other parts of world. It also up to using innovative technologies
and strategic capabilities to reduce its carbon footprint of its logistics operation.
Implementation

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This section covers relevant theories to see how Fonterra takes care of implementation of
manufacturing policies. Fonterra’s manufacturing policies can be understood from TQM and
Kaizen Theory.
TQM
It says that organizations need to continuously monitor the various divisions of operations
and identify the problem zones. It means measurement of performance holds a key place in
TQM. It further recommends gathering enough data and putting forward necessary measures to
rectify the problem areas. Moreover, it suggests taking contributions of employees such as
managers. Fonterra does follow the same path as being suggested from TQM. It is in regular
checks for innovative technologies to keep its tankers updated with it (Valmohammadi &
Roshanzamir, 2015). Fonterra also deploys skilled managers at its every global site to ensure an
effective adherence to manufacturing standards.
Kaizen Theory
The theory encourages to be in continuous improvement by following a few stages such
as identifying challenges, Kaizen and ‘go and see’. Kaizen encourages going for innovation. ‘Go
and See’ is about opting for problem solving (Pour-Rouholamin et al., 2015). As mentioned
earlier, Fonterra uses innovation in its operations to strive to the best. Fonterra uses tankers those
that are upgraded with latest technologies. It also deploys innovative strategies to reduce water
consumption, energy emission and carbon footprint of Fonterra. Fonterra follows the ‘Go and
See’ stage of Kaizen theory by finding ways to manage problems. Fonterra effectively manages
its global operations through a global operations framework that strives to achieve an
ISO14001:2015 certification. The framework is supported with skilled employees and strategic
managers being deployed to its every foreign manufacturing sites.

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Diversity and Inclusion Policy
In building up the Diversity and Inclusion Strategy, and distributing the first
sustainability report, Fonterra estimates and writes about the sex pay proportion. Their approach
is that no unexplainable pay gaps are there between male and female workers for a similar kind
of job. Pay gaps within job roles are clarified by variables, for example, level of qualification,
tenure and experience. Salary distribution is internally monitored to cross-check whether any
violation of policy has happened. For waged workers, this policy is implanted in Fonterra’s
operational policy. They have same policy for regardless of business who are employed. Across
the five biggest working areas, the proportion of the female to male base pay is 1.09 – implying
that female base pay rates are higher. A close working with local markets is essential to
Fonterra’s success around the world. By recruiting the local talent, Fonterra contributes towards
the shared success of their co-operative and countries they operate. In 2014, Fonterra received
ISO26000. The certification is an evidence of Fonterra’s responsible operation towards attaining
their aim. Fonterra emphasises on due diligence to ensure that human rights are effectively
followed and fulfilled (Fonterra, 2018).
Implementation
The implementation of these policies can be understood from ‘TQM’ and the ‘Cause and
Effect Theory’. ‘TQM’ encourages to build up an environment where employees feel respected
and comfortable and are encouraged to improve their abilities to deliver potential outcomes.
Fonterra’s diversity and inclusion policies are supported from industry’s standard guidelines for
the policy. It did receive ISO26000, which indicates how explainable Fonterra’s diversity and
inclusion policy from TQM is. The policy is also explainable from the ‘cause and effect’ theory.
The theory suggests that effects are in direct proportion with causes. Fonterra’s diversity and

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inclusion policy has resulted in a workforce, which is responsive to the external business
environment. Fonterra shown its trust in local farmers and workers. They were able to deliver the
naturally grown milk ingredients and milk with the help of a diverse workforce where female
workers have different jobs to do (Lindebaum, 2016).
Ethical Behavior Policy
Honesty and integrity is a culture in Fonterra that is vital to Fonterra's aim to offer the
worlds most trusted in dairy nutrition sources. The way Fonterra works, is Fonterra’s business
code and conduct. It is supported by arrangements like Group Policies, specifically the “Ethical
Behavior Group Policy”. The policy characterizes Fonterra's desires in regards to corruption,
business gifts, conflict of interest situations and entertainment. These three factors together with
their Board Charter defines Fonterra's code of ethics. Each one of the factors are required to be
reviewed and approved every single year.
Research & Development (R&D) is one of the sections of operations, which has a large
influence of Fonterra’s general policies. Fonterra continually strives to latest and innovative
technologies to make an impact on customer product strategy with its R&D capabilities.
Consumer product strategy of Fonterra can be classified into following categories (Fonterra.com,
2018):
Advanced nutrition: In the year 2017, Fonterra launched ‘Anlene Heart-Plus’ in Malaysia,
which is a new formulation to produce products especially compatible with people suffering
from diabetes and high cholesterol. It is being introduced to combat nutrition-related health
issues for diabetes and high cholesterol. Notably, ‘Anlene Heart-Plus’ was awarded the healthier
Choice logo by the Ministry of Health in Malaysia.

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Everyday nutrition: Reformulation was introduced to Anchor Uno yoghurt in New Zealand to
reduce its sugar content. It was done in the year 2016. The reduction was done by an
approximate 40%. This did help ‘Uno’ to become the children’s yoghurt brand with lowest-sugar
content in New Zealand.
Affordable nutrition: It did provide ‘Anchor Fortified Milk Drink’ to people living in Ethiopia.
Anchor Fortified Milk Drink is a milk powder, which is being blended with ingredients that are
affordable. Hence, the purpose was to offer an affordable milk powder to people belonging to
lower and middle-income groups. Fonterra did make this happen by closely working with Food
and Nutrition Society of Ethiopia in 2016. In this way, Fonterra ensured that children belonging
to these income groups do not miss the essential nutrients, which they were missing due to a
high-cost.
Implementation
The implementation strategy for customer product strategy of Fonterra can be understood
with the help of 80/20 Rule. The rule says that 20% of the causes produce 80% of the effects
(Singson & Hangsing, 2015). The rule fits well with Fonterra, as the company is able to identify
potential partners in various parts of world to effectively promote its various products to a mass
people. For example, it collaborated with Food and Nutrition Society of Ethiopia in 2016 to offer
affordable milk powder to people of Ethiopia. The purpose behind was that children are not
deprived from using nutritional contents in their meal. It did consider a reformulation of ‘Uno’ to
make it the children’s yoghurt brand with lowest sugar contents in New Zealand. The launch of
Anlene Heart-Plus in Malaysia was inspiring for people with diabetes and high cholesterol.
These few steps just show Fonterra’s capabilities as utilising a minimal but powerful strategy to
make bigger impacts both from affordability and from nutritional perspectives of products.

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3:- (Task 2): Identify and critically assess at least four risk factors that impact Fonterra’s
operations and critically examine at least two strategies that Fonterra is employing to
manage its operational risks.
Four risk factors
Four risk factors for Fonterra are as listed below (Chapinal et al., 2014):
1. Economic factors in short-term
2. Farmer’s inability to manage their cash flows
3. Most farmers are at this moment focused on sort-term trades in this dairy industry
4. Declining market shares
Causes
Economic factors in short-term
Production is declining such as in North Island. There will also be a declining supply of
dairy ingredients, raw materials and other related products. It is because companies such as
Oceania, Synlait and Yashili will continue expanding in medium and long-term to grab
opportunities in the form of demands for value-add products in China and other Asian countries.
Farmer’s inability to manage their cash flows
Farmers face the challenge in managing their cash flows because investors are now
moving to bigger firms than the smaller. Investors are going the other way as believed by
Fonterra, which is to work with local suppliers and pay them equally. Additionally, Fonterra is
largely an investor-owned company. Both investors and farmers in Shareholders Fud of Fonterra
are going for dividends instead of retentions. Hence, Fonterra that is an investor-owned company
is certain to become a capital-constrained firm.
Most farmers are at this moment focused on sort-term trades in this dairy industry

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Investors are largely moving to bigger firms for avoiding equal pay policy as adopted by
Fonterra to those who are in far-flung areas. It means these farmers will face the declining
demand for milk. Hence, they will left with no other option than to reduce the number of cows
and so, the production of milk. Eventually, they will eye on their short-term existence in the
dairy industry.
Declining market shares
In over last 15 years, Fonterra has enjoyed an increase in the supply of milk by about
45%. On the other hand, it has also witnessed a drop in its market shares as it dropped down
from 96% to 85% (Fonterra.com, 2018). Since, companies such as Synlait is currently engaged
with increasing its supplier base and Oceania with its processing capabilities, market shares of
Fonterra is going to be affected more in the next two years.
Solution
In the medium term, Fonterra can still enjoy a golden era, as long as China does not go
for implementing its own laws. The global restructuring of dairy industry is still to happen.
Hence, Fonterra can see good businesses in a medium term. However, situation can be not so
good in long-term.
1. Fonterra is trying to retain its farmers for their long-term association with the company.
To achieve this, Fonterra has planned to collaborate with MG in Australia that once had
2500 shareholder suppliers. Fonterra’s shareholders are now sure of that they will have a
100% control over farmers with the help of their deal with MG. There will be a
reduction in debt funding and suppliers would be able to attract an assured market price
for their shares (Oliveira et al., 2015). These solutions are as per the TQM rule, which

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aims to produce an environment where employees are co-operative towards
organizational mission and vision statement.
2. Fonterra is also considering a capital restructuring of the firm by seeking an approval of
the recapitalization of Silver Fern Farms in Balclutha. The strategy will improve
Fonterra’s balance sheet, which is one of the reasons why investors are losing faith in
Fonterra. Fonterra’s shares are linked to milk supply and if that falls, there will be drops
as well in market shares. Investors will definitely deny staying loyal to a firm, which
does not ensure permanent capital especially in uncontrollable times such as droughts
(Oliveira et al., 2015). There is rather the need for a permanent improvement, which
could be attained with the help of Kaizen theory. Kaizen is a set of activity that
encourages to achieve constant improvements in the system. It can be done by improving
standardized programmes, involving employees in the process and constantly looking
towards the solution.
4:- (Task3) probability and potential impact of operational risks on Fonterra’s operational
objectives
Risk Log (FMEA Analysis)
Risk Factors Potential failure modes Potential failure effects
1.Economic factors in short-
term
Supplies will decrease and
other companies such as
Synlait, Oceania, and
Yashili will grab
opportunities in China and
Customers will get cheaper
dairy products but these
products will be from cows
that are not 'grass-fed, non-
GMO', the differentiation that

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other Asian countries with
value-add products
is specific only to New
Zealand dairy.
2.Farmer’s inability to
manage their cash flows
They will quit their long-term
association with Fonterra
Fonterra and New Zealand
dairy is the main source to
quality dairy products in
Asian countries. Hence, the
supply will decrease.
3.Most farmers are at this
moment focused on sort-term
trades in dairy industry
There will be less number of
cows and hence, the
production of milk. This will
have an overall impact on the
Fonterra’s production
capability.
There will be a reduced
supply of organic milk and
dairy products.
4.Declining market shares Synlait with increasing
supplier base and Oceania
with the processing
capabilities will further affect
market shares of Fonterra
Reduced supply of organic
milk
Table 2: Risk Log
Severity Scale
Effect Severity level Ranking

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10
Hazardous – With Warning May expose Fonterra and its
shareholders to loss or harm
9
8
7
6
5
4
3
2
1
Table 3: Severity Scale
Occurrence Scale
Failure Probability Time Period Ranking
10
9
8
7
6
5
4
Failure is likely provided that Over 2-3 years 3

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no countering strategies are
imposed
2
1
Table 4: Occurrence Scale
Detection Scale
Detection Criteria Ranking
10
9
8
7
6
5
4
3
2
Almost certain Failure modes are known to
Fonterra
1
Table 5: Detection Scale
FMEA Recommendation Sheet for Risk Control
RPN Level Action

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>600 Critical Urgent action required
Table 6: FMEA Recommendation Sheet for Risk Control
5:- Conclusion
In summary, this can be said that Fonterra may face potential challenges in long-term in
terms of retaining its investors’ trust on the company. It may also lose some farmers who have
decided not to continue with the dairy industry in long-term. Therefore, it is of huge urgency to
take strategic moves to respond to challenges as mentioned in this report.

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References
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factors for lameness and hock injuries in Holstein herds in China. Journal of dairy
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https://www.fonterra.com/nz/en/careers/life-at-fonterra/diversity-and-inclusion.html
Fonterra.com. (2018). Retrieved from https://www.fonterra.com/content/dam/fonterra-public-
website/pdf/fonterra-2017-sustainability-report-environmental-reporting-notes.pdf
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environment for all its worth. Environmental management, 56(3), 709-720.
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Lyons, N. A., Eastwood, C. R., Rueb, B. D., & Kerrisk, K. L. (2016). Current and future
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Oliveira, C. S. F., Hogeveen, H., Botelho, A. M., Maia, P. V., Coelho, S. G., & Haddad, J. P. A.
(2015). Cow-specific risk factors for clinical mastitis in Brazilian dairy cattle. Preventive
veterinary medicine, 121(3-4), 297-305.

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decrease nutrient losses to waterways in the New Zealand dairy industry. Rural Extension
and Innovation Systems Journal, 12(1), 23.
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