Case Study: Dairy Sector Supply Chain Development in a Conflict-Affected Region of Colombia infoD v INNOVATION & ENTREPRENEURSHIP Case Study: Dairy Sector Supply Chain Development in a Conflict-Affected Region of Colombia © 2018 The World Bank Group 1818 H Street NW Washington, DC 20433 Website: www.infodev.org Email: info@infodev.org Twitter: @infoDev Facebook: /infoDevWBG This work is a product of the staff of the World Bank Group. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the donors of infoDev, the World Bank Group, its Board of Directors, or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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License: Creative Commons Attribution CC BY 3.0 Photo Credits: Cover Photo: Grecaud Paul / Adobe Stock Case Study: Dairy Sector Supply Chain Development in a Conflict-Affected Region of Colombia infoD v INNOVATION & ENTREPRENEURSHIP Case Study: Dairy Sector Supply Chain Development in a Conflict-Affected Region of Colombia Acknowledgements This case study was developed by the infoDev and Industry Solutions Units of the Finance, Competitiveness & Innovation Global Practice of the World Bank Group with technical support from Agland Investment Services and J.E. Austin Associates. Other contributors include the International Finance Corporation and the Agriculture Global Practice of the World Bank Group. The study team included Anupa A Pant, Blair Edward Lapres, Ellen Olafsen, Loraine Ronchi, and Peter A Cook of the Finance, Competitiveness & Innovation Global Practice, and William Mott, Martin Webber, Stephanie Haile, Madeleine Nelson, William Scott, Gareth Smail, Donald M. Taylor, and Laya Hess-Skinner of a consortium of Agland Investment Services and J.E. Austin Associates. The team received guidance from a decision review panel chaired by Ganesh Rasagam and consisting of Dietrich Fischer, Milaine Rossanaly, and Christopher Ian Brett. The paper benefited from discussions with and guidance from numerous World Bank colleagues, Bradford Roberts, Parmesh Shah, Selchuk Tanatar, Bas Rozemuller, and Sarah Ockman. This study was made possible through the support from the governments of Norway, Sweden, Finland, and the UK’s Department for International Development (DFID). Case Study: Dairy Sector Supply Chain Development in a Conflict-Affected Region of Colombia Table of Contents Synopsis 1 Introduction: Alqueria’s Expansion 1 Dairy Market Conditions, Challenges and Opportunities 2 A buyer’s market: raw milk supply in colombia 2 Alqueria’s expansion and sme growth opportunities 3 Within the milk supply chain, Alquería directly buys milk or services from: 4 Alqueria’s Supplier Development And Training Activities 4 Government-administered technical training. 5 Alquería-administered trainings. 5 Material assistance. 6 RESULTS - EXAMPLES OF SME LINKAGES AND GROWTH 6 Agrolecheros – El Meta 8 AGROLAC – El Meta 9 Lessons Learned 11 Lesson 1: Alquería-SME linkages are motivated by real business benefits to both parties. 11 Lesson 2: Public programs administered through public-private collaboration were an important element in developing SME capacity. 11 Lesson 3: Alquería’s growth created new markets for agro-processing (dairy) SMEs, but supplier development activities were needed to improve productivity and reduce risks associated with milk quality and quantity. 11 Lesson 4: Supplier development activities required customization to suit SME needs. 11 Lesson 5: Improvements in Colombia’s enabling environment played a significant role in creating opportunities to expand linkages between lead firms and SMEs. 11 References 12 Synopsis Introduction: The Colombian private dairy processor Alqueria’s Expansion Alquería has grown rapidly since 2005. As the company expands its supply of raw milk, it has also facilitated the growth of small and medium enterprises (SMEs) in its supply chain. These linkages are motivated Colombia’s third-largest dairy processor, Alquería S.A., by real business benefits for both parties, collected 877,000 liters of raw milk per day on average in and have been supported by Alquería’s 2014, and earned $242 million1 through sales of milk and supplier development programs, as well milk products (Alquería 2015, 63). The operation relies on as government and donor assistance. a supply chain that encompasses seven processing plants, Government and donor assistance has 14 regional collection centers, and an estimated 13,000 consisted of funding and equipment dairy farmers, supported by hundreds of contractors, donations, primarily at the departmental intermediaries, and service providers (Alquería). and municipal level, but also at the national and international level in post-conflict To expand the company’s growth, Alquería has sought consolidation zones. Alquería has also new ways to increase the quality and quantity of its raw partnered with the government to deliver milk supply while reducing costs. Following the launch of training programs to farmers in its supply pilot programs to improve farmer productivity, notably chain, and the company offers customized with El Meta in 2008, Alquería has come to regard technical assistance to SMEs through its supplier development as integral to its milk buying milk buying program. This case highlights operation, helping the company achieve a better value the integral role of Alquería’s supplier on raw milk and overall cost savings. The strengthened development activities in facilitating linkages between Alquería and the dairy producers and mutually beneficial supply relationships. intermediaries in its supply chain have improved the Comparatively examining SMEs in the competitive position of all stakeholders, fostered new departments of Cundinamarca and El Meta, and expanded small and medium enterprises (SMEs), and the study finds that the assistance provided increased revenues throughout the value chain. by Alquería and the opportunities for SME In 1958, Dr. Jorge Cavalier founded Alquería to supply growth have evolved as the company pushes fresh pasteurized milk in Sabana de Bogotá, the fertile into conflict-affected areas with unique highland valley that surrounds Colombia’s capital. For challenges and different modes of production. years, Alquería’s growth out of the Sabana was hindered by Colombia’s profound political, economic, and security crises. Yet as the business environment improved in the The author would like to thank Germán early 2000s,2 Alquería began a series of acquisitions that Castillo of Corporación CEA for his invaluable would allow it to break into the national market. Alquería contributions during the case study acquired regional processing plants near Calí (2004), fieldwork. Medellín (2011), Santa Marta (2013), and most recently in Santander (2015, financed by the IFC). 1 728,386,000,000 COP/year in sales. 2 The political paralysis caused by drug trade scandals left the country particularly vulnerable to the global financial crisis of the late 1990s (Steiner and Vallejo 2010: 148). As Colombia entered a recession, Alquería, like many Colombian companies, fared poorly, and in 1999 the company entered into a special bankruptcy process for viable businesses hit by the recession. By 2005, however, Alquería had reestablished its creditworthiness in record time (Avecido 2012, 57-58). 2 Alquería has also positioned itself as a high-quality, Milk production conditions vary dramatically in Colombia, higher-priced brand, offering a range of milk products but government policy broadly distinguishes between two to Colombia’s growing middle and upper classes. The modes of production found in two different climate zones: company has taken a number of steps to solidify this position in the last 15 years. Through joint ventures • specialized dairy farms in the tropical highlands, and (for example, Danone in 2008) and acquisitions, Alquería has expanded into dozens of milk product • Dual-purpose farms in the coastal and tropical lowland types, including sweets, desserts, yogurts, and milk climates. derivatives. Alquería now rivals Colombia’s top private dairy processor3, and is considered an industry leader The tropical highlands, especially the departments of in high value-added liquid milk products4 and yogurts. Antioquia, Cundinamarca, and Boyacá,7 have a tradition of dairy farming. These regions easily support high- producing European breeds, which are used exclusively for milking. Often located near Colombia’s major cities, these Dairy Market Conditions, Challenges farms tend to be smaller, constrained by higher real estate and Opportunities prices (Niño and Alcarón 2015, 14-18). Dairy farming in the tropical lowlands tends to be more A buyer’s market: raw milk supply opportunistic. When the price is right, farmers milk their less productive (about 2 to 4 liters per cow) tropical breeds in Colombia or European-tropical crosses. Otherwise, the cows nurse Colombian dairy processors like Alquería have grown calves for meat. While exceptions exist, dual-purpose in the last 10 years through higher value addition and farms tend to be located farther from processing plants, product diversification, but producers of raw milk which presents hurdles in getting milk to market. have encountered persistent challenges. Extreme climatic cycles5 have hurt production while input The raw milk market in Colombia is characterized by a costs have remained high. Meanwhile, new free trade small number of large companies buying from a large agreements have allowed for the importation of pool of small vendors (Superintendencia de Industria y powdered milk, a low-cost raw material alternative, Comercio 2013; FEDEGAN 2013). The top four industrial enabling processors to suppress the price paid to processors (Colanta, Alpina, Alquería, and Nestlé) dairy producers during times of scarcity. While raw collect half of the country’s formal production, while milk is essential for dairy processors like Alquería,6 the 10 largest companies collect nearly 80 percent producers have borne the burden of production (Superintendencia de Industria y Comercio 2013, 71). On setbacks and low competitiveness, even as the producer side, there are just under 500,000 farms processors have worked creatively with SMEs to move selling raw milk, and 66 percent of these farms have into new milk collection areas. fewer than 25 animals (Niño and Alcarón 2015, 23). Small farms are important not only for the quantity of milk they contribute to the market8, but for rural employment and 3 In terms of raw milk collection, Colombia’s largest dairy livelihoods (Niño and Alcarón 2015, 23).9 processor, Colanta, is organized as a cooperative. Alpina and Alquería are the country’s second- and third-largest processors, respectively, and the largest private companies in the industry 7 The official tropical highlands departments include: Cundinamarca, (Superintendencia de Industria y Comercio SIC 2013, 58). The Boyacá, Antioquia, Quindío, Risaralda, Caldas, Nariño, Cauca, y V alle SIC study estimated in 2013 that Alquería’s share of Colombia’s del Cauca. Tropical lowlands departments include: Cesar, Guajira, daily formal milk collection was 7 to 10 percent, Alpina was 8 to Atlántico, Bolívar, Sucre, Córdoba, Chocó, Magdalena, Norte de 15 percent, and Colanta was 20 to 30 percent. Alquería’s share Santander, Santander, Caquetá, Tolima, Huila, Meta, Orinoquia, y has likely grown through further acquisition in 2015. Amazonia. Though this classification is not absolutely accurate— 4 These include ultra-high temperature (UHT) pasteurized liquid “lowland” departments include specialized production and vice milk products like skim, lactose-free, semi-skim, and chocolate. versa—it is used for pricing policy (Superintendencia de Industria y 5 El Niño and La Niña Comercio 2013, 17-20). 6 The Colombian government limits the percentage of 8 23 percent of total milk comes from farms with fewer than eight reconstituted powdered milk in liquid milk products. animals. 3 Recognizing the asymmetries in information and Alqueria’s expansion and sme market reach between producers selling raw milk and the purchasing processors, the Colombian9 Ministry of growth opportunities Agriculture and Rural Development (MADR) has taken Despite the considerable challenges faced by dairy steps to control the prices paid to producers. The current producers—including high input costs, unpredictable pricing structure, called “payment for quality,” calculates climate cycles, poor international competitiveness, the price of a liter of milk purely on composition and and asymmetry with buyers—the sector has hygienic qualities.10 witnessed a gradual increase in formal production, and subsequent opportunities for SME growth. 9 The SIC (2013) estimates that dairy farming represents 3.18 This case study uses the term “formal SME” to percent of Colombia’s total employment. According to Niño and Alarcón (2015), there are 618,000 total jobs in dairy farming. Small denote organizations—such as farmers’ cooperatives, farms of less than eight cows can be estimated to employ 134,500 associations, and private intermediaries—that are workers—21 percent of jobs in the sector—assuming six jobs per officially registered with the government. Formal cow. Farms of less than 30 cows employ 301,100 using the same SME organizations offer individual dairy farmers logic. (Extrapolations are based on Niño and Alarcón 2015, 23 and 74.) opportunities to reduce input costs, improve price 10 Though this approach represents a move away from a previous and demand stability, and increase output. Moreover, minimum price scheme, buyers complain of insufficient price dairy processors like Alquería are expanding into competitiveness during times of surplus, which they argue former conflict regions that have been historically encourages informality and makes export competitiveness difficult. 4 isolated from the national economy, generating demand functions, these intermediaries tend to fall into three for organizations to incorporate thousands of small new categories of legal organization: entrants to the sector. • Cooperatives. These formal organizations bring Formal SME organizations often provide similar value- together individual farmers to collect, chill, and sell added functions to the supply chain: collection, chilling, milk on better terms or a larger scale. In addition and quality check of raw milk, and in some cases, to providing shared equipment and technicians transportation. However, their legal structures and to collect and test milk, cooperatives often assist profit schemes can differ: Some are cooperatives or farmers in obtaining inputs and veterinary services associations of farmers, but others are truly private at discounted rates by negotiating as a group. intermediaries. They range in employment depending They might also buy, collect, chill, and sell milk on their size and capacity, from one to more than 15 from individual farmers who are not due-paying employees. Importantly, formal organizations like members of the cooperative. Profits are reinvested cooperatives and associations allow farmers to benefit or redistributed to members. Members serve as from ministerial and departmental support programs, managers of the cooperative, and they may or may which have been introduced in response to the sector’s not be compensated depending on the organization. recent climatic challenges. • Associations. Unlike cooperatives, associations are nonprofit entities that must reinvest all earnings into the organization or social activities Within the milk supply chain, Alquería for producers or the surrounding community. directly buys milk or services from11 Associations are typically formed by a core of dairy producers, though they often purchase milk from • Individual farms. Alquería collects about 20 percent other farmers and sell it to Alquería. Associations of its raw milk supply directly from 1,479 farmers are similar to cooperatives in their management (Alquería 2015). These farmers tend to specialize in and hiring of employees. dairy production and are located nearby collection • Private Intermediaries. These businesses purchase, centers or processing plants. Alquería only purchases collect, and chill milk from small farmers, often chilled milk directly from farmers; therefore, while purchasing at a lower price than the MADR’s these farms range in size, each necessarily has “payment for quality” guidelines and selling to sufficient capital investment in equipment to chill milk Alquería at a markup. Intermediaries have gained on the farm immediately after milking.12 a negative reputation in the dairy sector for this • Collection and chilling intermediaries. Alquería practice, but they have played an important role collects the remaining 80 percent of its milk from in Alquería’s expansion. A private intermediary various types of SME intermediaries, indirectly drawing may be as simple as an individual with a truck who from 5,887 farmers. While fulfilling similar value-added delivers to one of Alquería’s collection centers, or a midsize business with a collection, chilling, and transformation facility. 11 Alquería has outsourced all of its transportation, for both distribution and supply, to third party contractors. Transporters provide two types of services: milk collection routes near Alquería’s plants, and milk relocation between Alquería’s collection centers and plants, or between plants. Alquería maintains a high degree of control—trucks are required to be on call at all times, assigned Alqueria’s Supplier Development And to rotating routes by Alquería. Alquería also limits the number Training Activities of trucks provided by a single firm to three, though this does not necessarily limit the growth of transport SMEs, as they can provide Supplier development activities are a fundamental pillar transport services to other companies (with other trucks and of Alquería’s milk buying operation. Alquería’s milk buying drivers) as well. division, Fomento Ganadero (or “farmer development” in 12 These farms tend to be larger and more commercial within the English), is responsible for both negotiating purchases context of specialized dairy regions (i.e., more than 20 cows), but farm size in these regions is generally constrained to less than and administering technical assistance. This dual role 50 cows by the rugged geography and high land prices. While represents a strategic vision for increasing supply by there are experiments with mega-farm operations in the lowland increasing the quantity and quality of output from llanos, this has yet to become a proven business model or part of small producers. Alquería’s supply. 5 Alquería’s earliest efforts to offer technical Government-administered assistance focused on finding a lower-cost mode of production, but it quickly became apparent technical training that with relatively little resource investment, Alquería’s first government-assisted trainings were carried Alquería could dramatically increase the quality and out in partnership with the Servicio Nacional de Aprendizaje productivity of their providers. While not reducing (SENA), a public technical training institution to which the farm-gate price of raw milk, the improvement all Colombian companies are required to contribute in farmer productivity has benefited Alquería’s funds. SENA maintains a network of centers that offer supply expansion in at least two ways: First, higher training programs that are relevant to the local economy. productivity per farmer (or per intermediary) Corporations like Alquería typically send their employees to means that Alquería can increase supply without SENA for training in management, accounting, or logistics. incurring new marginal costs related to expanding In 2005, when Alquería began searching for new ways to its collection operation. Second, while higher-quality improve supply, it proposed a unique solution to have SENA milk commands a greater price, it lasts longer extend its training to producers. and offers a better value for creating derivative Alquería’s agreement with SENA resulted in two products, which depend on fats and solids rather programs: The first, Formación Complementaria, enrolled than volume. producers regardless of age or education in pre-existing Fomento Ganadero’s primary measure for the SENA programs on good farming practices, feeding success of its technical assistance program is the and land management, farm financial management, quantity of production (in annual liters per hectare) and insemination. Producers visited a SENA center on over a given area. By Alquería’s own admission, weekends, and over the course of several months could earn this is an imprecise measure at best, as production a certification. Formación Complementaria was funded by quantity is heavily dependent on seasonal and Alquería’s legally-required contributions to SENA, and there climatic factors. Therefore, without a direct link were few adjustments to the curriculum of the pre-existing between the technical assistance program and government program to meet Alquería’s specific needs. variations in production, it is difficult to calculate The second SENA program, Herederos de Tradición a cost-benefit analysis of supplier development (“inheritors of tradition”), was aimed at youth connected programs for Alquería. Similarly, the ancillary to Alquería’s supply chain. Young people spend one and a benefits of supplier development activities— half years at a SENA training center to become certified such as increased supplier loyalty and positive dairy technicians, and then six months in an internship in public relations—are difficult to determine from their region of origin. While SENA provides room and board this business case. Nonetheless, the integration and the core training, Alquería contributes additional in- of supplier development and raw milk buying kind support to the program, offering soft skills training in has represented an evolving experiment for the leadership or interpersonal communication and a minimum company, and the program’s continued existence wage salary to participants throughout the two-year suggests it has been valuable in helping Fomento program. In contrast to Formación Complementaria, which Ganadero achieve its targets and expand its supply was a pre-existing government program, Herederos de network. Tradición was developed in partnership with Alquería and Any producer, cooperative, association, or private tailored to fit their needs. business within Alquería’s supply chain is eligible to participate in the company’s formal assistance programs. This assistance can be divided into three Alquería-administered trainings categories: government-administered training Alquería has two additional programs that evolved out of programs, participatory development programs pilot projects in La Macarena region of El Meta. In 2007, the delivered by Alquería, and material assistance. government convened a conference of private companies Fomento Ganadero agents have the discretion under a regional “consolidation” program with the goal of to determine the appropriate level of training or directing investment to the region, which had been affected material assistance for each enterprise, often with by guerrilla and paramilitary activity and coca production. the goal of incentivizing, rewarding, or improving a In 2008, Alquería launched a pilot project in partnership with the German Society for International Cooperation vendor’s relationship with Alquería. 6 (GIZ) and the United States Agency for International midsize enterprises, often in the form of equipment Development (USAID) to begin collecting milk from small loans (like chilling tanks) or personalized trainings and farmers in the region. The program was launched by the management advice. For example, when Alquería was national and departmental governments, who instructed competing with another buyer for a cooperative’s raw GIZ and USAID on where to invest resources. milk supply, Alquería’s agents brought a technician to reactivate a defunct milk chilling tank on the Through the course of the program, Alquería’s Fomento cooperative’s facility, lent a milk collection truck, Ganadero agents encountered significant challenges in and then trained one of the cooperative’s employees establishing trust and positive relationships with small in lab work. With this increased capacity for chilling farmers. These challenges led Alquería to introduce two and collection, the cooperative hired an additional new methodologies focused on facilitation and group employee and nearly doubled its business with Alquería learning, rather than simply technical training. simply by collecting raw milk that had never been a part of the cold chain. In this way, Fomento Ganadero The first methodology, known as Escuelas del Campo agents develop relationships with farmers, and de Agricultores (ECA), adapted the United Nations Food dispense assistance and even equipment according to and Agriculture Organization’s “farmer field school” a holistic assessment of its potential effectiveness. approach to the dairy sector. Now scaled to Alquería’s national operations, ECAs are facilitated directly by Fomento Ganadero agents and consist of six sessions RESULTS - EXAMPLES OF SME with a group of producers who are brought together by an intermediary, cooperative, or association. ECAs give LINKAGES AND GROWTH producers more agency to determine the methodology Dairy production SMEs servicing Alquería have grown and content of technical assistance, although Alquería in both number and size, mirroring the company’s insists on the delivery of certain modules, such as exponential growth over the past 15 years. Dairy lessons on good milking practices and the MADR’s producers have responded well to market growth payment procedure. and customized technical (and sometimes material) assistance, as demonstrated by the three examples The second methodology, called Plan Finca (“farm plan”), discussed in the following section. consists of a year-long program in which Fomento Ganadero agents work directly with farmers to design Alquería has a different relationship with its supply site-specific plans for pasture, herd, and feeding chain in the established dairy production regions in the management. Plan Finca is Alquería’s most cost-intensive highlands in comparison to the new production regions supplier development activity in terms of staff time. in the lowlands. Until 2005, Alquería exclusively collected from the tropical highlands, which have As Fomento Ganadero has progressed, Alquería’s a long history of specialized dairy farming. All the qualitative and early quantitative assessments have major dairy processors collect from this region, and favored the ECA methodology over other programs in it is a site characterized by high productivity and terms of cost effectiveness and gains in productivity. As intense competition for supply. As illustrated by the program requires considerable time spent off site, the COAGROLAS example below, Alquería has still SENA’s Formación Complementaria has proven to be managed to form new relationships with dairy farmers incompatible with the needs of small producers in tropical and cooperatives in the tropical highlands, despite the lowlands, given their distance from SENA’s training region’s apparent saturation. centers. In comparison, the ECAs have improved Alquería’s direct relationship with small producers and allowed for Alquería’s expansion into the lowland El Meta immediate application of technical training material. department has followed a unique trajectory. El Meta has been a stronghold of Colombia’s largest insurgent group, the FARC-EP, which exercised de facto control Material assistance over large swaths of land between 1998 and 2002. The SENA and participatory programs form part of the In 2002, the Colombian government reestablished a toolkit that Fomento Ganadero agents use in nurturing security presence in the region. Alquería’s pilot project supply. However, agents also draw upon company in La Macarena represented the first investment for resources to offer customized assistance to small and the company in the region, and was followed by rapid 7 expansion in other areas. El Meta has a long tradition Over the course of its relationship with Alquería, of cattle ranching with tropical and mix-breeds. Market COAGROLAS has benefited from the company’s access to Alquería has also incentivized small-scale material support and technical training programs. In farmers to switch to dairy farming. terms of material support, Alquería provided one of the cooperative’s three chilling tanks (1,950 liters) The following examples explore three collecting and as an equipment loan. Alquería does not require (nor chilling intermediaries—a cooperative, an association, is it legally allowed to require) exclusivity contracts and a private intermediary—and their growth as with producer organizations and other small and a result of their business linkages with Alquería. midsize suppliers. Yet as a condition of equipment The intermediaries represent two departments loans, Alquería requests that SMEs use the company’s (Cundinamarca and El Meta) that are distinct in their equipment exclusively for milk sold to Alquería. After geography, mode of production, infrastructure, proximity a three-year agreement, the parties can continue with to processing facilities, and security challenges. the loan, the SME can return the equipment in perfect condition, or the SME can purchase the equipment from Organization Type: Cooperative Alquería. COAGROLAS is currently in the second three- year period of this arrangement. Average Daily Collection: 2,400 – 3,900 liters Alquería has also provided technical assistance to COAGROLAS. The cooperative’s members have Pre-linkage production participated in the SENA-administered certification 750 liters (2008): program Formación Complementaria, and at the time of the interview, COAGROLAS and Alquería were in 1,100 million COP (est.) discussion to begin the more participatory Alquería- Annual Revenue: administered ECA program, as well. $367,000 The president and manager of COAGROLAS spoke positively of the cooperative’s relationship with Alquería Employees: 1 (plus one contractor) and the assistance received over the years. Nonetheless, they emphasized that it was a business relationship Affiliated Producers: 28 in a hard time for business. As a result of the drought conditions in 2016, many dairy farmers could barely collection, chilling, make ends meet, even as Alquería’s prices increased Value added processes: slightly. Within six months, the cooperative planned cold storage to become certified in good dairy practices, which would add 10 pesos per liter to the price structure they negotiated with Alquería. COAGROLAS - Cundinamarca, Sabana de COAGROLAS continues to sell exclusively to Alquería; Bogotá Alquería has proven to be a reliable and fair partner, The cooperative COAGROLAS was founded in 2008 purchasing as much milk as the cooperative is able to by 20 dairy farmers who hoped to collectively market produce. In the long term, however, COAGROLAS sees their milk in the Cundinamarca town of Suesca. Located the greatest potential for higher margins and profits 40 kilometers from Alquería’s main plant in Cajicá in the value-added derivatives, especially cheese, sold (just outside of Bogota), COAGROLAS has worked outside of Alquería’s supply chain. with Alquería since its inception, initially as a simple Alquería’s demand for raw milk has been essential to the assembly point where farmers could bring cannisters growth of COAGOLAS since 2008, yet the company’s every morning to meet the Alquería collection truck. By supplier development activities represent just one 2015, COAGROLAS had grown its daily collection from aspect of a mosaic of funding and capacity building 750 liters to a high of 3,900 liters. Its membership grew that the cooperative has procured. Indeed, a major by 40 percent to 28 small and midsize producers. Some impetus for its founding was to access government farmers have as many as 30 cows and others have as grants available only to farmer cooperatives. The first few as one. investment by COAGROLAS—its collection facility— 8 was jointly financed by personal investments from members and donations from the municipal government. Organization Type: Association The cooperative has subsequently procured equipment grants, loans, and technical assistance from the Average Daily Collection: 15,000 – 19,000 liters Cundinamarca departmental government, CONDENSO (Colombia’s electric corporation), and MADR. The Pre-linkage production 500 liters cooperative purchased a collection truck through a (2007): savings plan with capital from members, as well. 4,000 million COP Annual Revenue: $1.3 million Agrolecheros – El Meta Agrolecheros is an association of dairy producers Employees: 9 (plus 5 contractor) based in the El Meta piedmont town of Mesetas. The association was founded in 2007 by dairy producers Associates: 10 in Mesetas who came together to commercialize their raw milk for sale in larger markets. The growth of Producers: 246 Agrolecheros during its partnership with Alquería has been remarkable, beginning with 500 liters per day and collection, chilling, reaching a high of 19,000 liters per day. Value added processes: cold storage, cheese Unlike in Cundinamarca, Alquería’s demand for raw (incipient) milk in Mesetas has been transformative for the local economy. Mesetas was one of the municipalities located in the zona de distensión (de-escalation zone) FIGURE 2: AGROLECHEROS EXPERIMENTS established by an accord of the government and the WITH CHEESE PRODUCTION. FARC rebel group in 1999. As a result, the municipality was de facto FARC territory until a renewed effort by the Colombian army pushed them out and underground. Nonetheless, the FARC maintain a presence in the countryside. Until the eradication campaigns between 2006 and 2008, coca and other illicit cultivation were the basis of the economy. Alquería’s relationship with Agrolecheros—as well as its investment in El Meta more broadly—was a part of a strategy to expand into lowland, dual-purpose production regions in order to obtain lower-cost supply. Bolstered by government and international donor co- investment, Alquería accepted the additional risk of sourcing from this unstable region. Alquería’s demand for raw milk created an alternative to coca livelihoods lost with the return of the government to the region. When Agrolecheros was founded, prices were unstable and the only raw milk buyers in the area were informal queseros offering 250 pesos per liter. In response to these conditions, the association was founded by a core group of 10 producers with sufficient personal wealth to invest. Yet when Alquería’s payments and collections began on a regular 15-day schedule, small producers flocked to sell raw milk. With Alquería as a buyer, the association was able to pay 550 to 9 600 pesos per liter. Over the years, the association AGROLAC – El Meta has helped producers make significant gains in the hygiene and volume of the milk they provide; for AGROLAC is a private intermediary based in Puerto example, some farmers who initially produced 5 Lleras, El Meta. Selling exclusively to Alquería since its liters of milk per day now have daily yields of 80 to incorporation in 2008, AGROLAC has grown at a slower 100 liters. rate than Agrolecheros, beginning at 240 liters and reaching a high of 5,500 liters. Like COAGROLAS, Alquería’s supplier development activities are one of several sources of assistance Alquería has been the only provider of technical for Agrolecheros. Alquería has loaned Agrolecheros assistance to AGROLAC, arranging for a young person two 2,000-liter chilling tanks, which represent associated with the intermediary to participate in the only 10 percent of the association’s total capacity. Herederos de Tradición program. The young person Alquería also provided technical assistance to has spent the past year and a half training at SENA’s Agrolecheros’ producers through its Escuelas del center in Villavicencio, and will spend six months as an Campo program, which offered workshops on themes intern with AGROLAC, working with about 80 of the requested by participants, such as milk pricing, intermediary’s producers to implement a version of Plan pasture management, good milking practices, and Finca that focuses on improving the genetics of the herd. hygiene. The workshops were discontinued when AGROLAC has received no assistance from Alquería or safety issues emerged for participants traveling from other sources in financing its facilities development. In distant farms. More recently, a young member of this regard, AGROLAC is penalized by its geographic the Agrolecheros network participated in the SENA location and its legal status as a private business. The Herederos de Tradición program. municipality of Puerto Lleras falls outside the historical This assistance represents only a small portion of the zona de distensión and as a result has been passed investments that have allowed Agrolecheros to grow. over by the government and international donor aid Agrolecheros has benefited from partnerships with programs. This policy choice does not reflect the reality the Colombian government’s consolidation program of Puerto Lleras, which was the site of violent clashes (supported by the United Nations), USAID, and soon, between the military, paramilitaries, and the FARC prior the G7. Much of the association’s equipment has been to 2006. The economy has been equally affected by a purchased with the personal capital of association history of coca production and FARC extortion. members, including two chilling tanks (5,600 and 4,000 liters) and two cold-storage silos (5,600 and Organization Type: Private Business 15,500 liters). Agrolecheros was also the recipient of an “ice bank” milk chiller from USAID (valued at 230 million pesos or US$77,000). Average Daily Collection: 5,500 liters Agrolecheros is now the largest business in the Pre-linkage production Mesetas area. The association is seeking to double its 240 liters (2008): daily milk collection to utilize its full storage capacity; however, it faces considerable competition from 2,000 million COP local formal and informal cheese makers for supply. Annual Revenue: $700,000 The average daily collection of the entire Mesetas area is just over 40,000 liters daily, a benchmark Employees: 3 (plus contractors) Agrolecheros that hopes to meet. This considerable increase in collection will need to come from improved productivity from existing providers. Agrolecheros has Associates: 8 also drawn up plans to begin transforming raw milk into cheese, and has experimented with processes and Producers: 125 packaging. While the association still needs crucial collection, chilling, cold equipment, it is well on its way to achieving the goal Value added processes: storage of adding value through transformation. 10 FIGURE 3: AGROLAC RECEIVES MILK FROM A LOCAL TRANSPORT CONTRACTOR AGROLAC began as a private business with a Over the last three years, AGROLAC has struggled social mission of providing livelihoods to former under multiple pressures. First, the company faces a coca growers. After the government’s eradication significant formal tax rate based on its income. As a campaigns reached the area in 2008, devastating private business, AGROLAC has a higher rate than that the area’s agricultural livelihoods, AGROLAC sought of cooperatives, associations, or informal processors. to provide enough income to keep farmers on their Second, AGROLAC’s producers have experienced land. AGROLAC’s founders considered incorporating particularly low yields as a result of weather conditions, as an association; however, they were concerned and several producers have discontinued production about the perception of associations as vehicles for altogether. Third, AGROLAC has faced competition for government funds. In 2008, they incorporated as a supply from both informal cheese processors and other private business. formal intermediaries, which offer similar services to producers. These pressures have forced AGROLAC to lay Without access to public assistance, AGROLAC off two employees at its collection center, and defund founders raised capital investment for basic collection social programs the company had provided to producers, and chilling equipment by bringing in additional such as ranching and traditional dance classes for shareholders, including a local property owner with children. The company’s medium-term strategy for a facility that could be converted into a collection addressing these constraints is to increase farmer center. The other shareholders paid him out over time productivity through training from Alquería’s Herederos to ensure their shares were equal. de Tradición program. 11 Lessons Learned highland areas. However, faced with a highly fragmented supply chain, thousands of low-productivity dairy producers, and risks associated with climate variation, the company found it necessary to reduce supply chain risk and improve supplier capacity through direct supplier Lesson 1: Alquería-SME linkages are motivated development activities. Alquería’s supplier development by real business benefits to both parties. efforts have become important to its growth and market differentiation business model. The business linkages between Alquería and agro- processing SMEs are driven by the desire to achieve outcomes that are mutually beneficial. Alqueria, the Lesson 4: Supplier development activities lead firm, aims to improve its productivity and product required customization to suit SME needs. quality by developing sustainable relationships with suppliers that will ensure sufficient quantity and quality The evolution of Alquería’s supplier development activities of raw material supply. The agro-processing SMEs aim reflects the company’s increasing engagement with dual- to improve quality standards and productivity and purpose dairy producers. As Alquería expands into areas secure a reliable relationship with a buyer. These win-win where good dairy practices differ from the specialized relationships have fostered productive collaboration, model toward which most extension services are oriented, positive growth trajectories, and reduced risk for all the company has seen the need for a “learning” model of parties involved. supplier development that takes into account the different needs of dual-purpose producers. Alquería’s increased use of ECAs and Plan Finca reflects this emphasis. Conversely, Lesson 2: Public programs administered standardized, government-administered training provided through public-private collaboration were through SENA has had limited applicability as Alquería an important element in developing SME has expanded geographically. While certifications and weekend coursework were beneficial for those in the capacity. highland regions with good access to SENA training This case discusses the history, motivations, and facilities, the program has proved to be impractical for benefits associated with private sector-led linkages producers in remote regions. and supplier development activities. However, many of the linkages also benefited from government and Lesson 5: Improvements in Colombia’s enabling donor assistance that addressed institutional capacity constraints or infrastructure gaps, particularly in post- environment played a significant role in conflict zones. These public efforts reduced or even creating opportunities to expand linkages underwrote the risks associated with Alquería’s linkages between lead firms and SMEs. with SMEs. Furthermore, the government’s SENA programs—Formación Complementaria and Herederos Political security and macroeconomic stability played a de Tradición—and complementary support from Alquería pivotal role in increasing the impact of linkages between continue to improve the capacity and productivity of dairy processors and producers. The comparative dairy enterprises. growth trajectory of COAGROLAS, Agrolecheros, and AGROLAC speaks to the importance of changing context: COAGROLAS grew within an environment Lesson 3: Alquería’s growth created new that had supported specialized dairy farming for years. markets for agro-processing (dairy) SMEs, but Thus, the growth of the cooperative is best explained supplier development activities were needed by the increased productivity of its original farmers. to improve productivity and reduce risks (The cooperative has grown from 20 to 28 farmers.) Conversely, the extension of physical security and new associated with milk quality and quantity. infrastructure has greatly improved the environment As Alquería expanded to meet growing demand from for formal milk collection in El Meta. Agrolecheros and Colombia’s expanding middle-income population, so did AGROLAC have grown as much through their networks of its need for raw material supply. The company sought new entrants as through improved farm-level production: growth opportunities in the country’s lowland and Agrolecheros grew to encompass 246 producers, and post-conflict areas in addition to the well-established AGROLAC grew to 125. 12 References Alquería. 2015. Informe de Sostenibilidad 2014. http:// Niño and Alarcón. 2015. “Mooooi Dairy Opportunities… for www.alqueria.com.co/informesostebilidad2014/ a Colombian-Dutch win-win Collaboration: A fact finding informesostebilidad2014.html#1 study.” Business Bridge. Alquería. “Nuestra Mega 2-20-20.” http://www.alqueria. Superintendencia de Industria y Comercio (SIC). 2013. com.co/filosofia-organizacional/nuestra-mega-2-20-20/ Análisis del Mercado de la Leche y Derivados Lácteos en Colombia (2008 – 2012). Avecido, Julian Andres Anzola. 2012. “Alquería: ‘Una historia de larga vida que empieza aquí.’” Thesis, Steiner, Roberto and Hernán Vallejo. 2010. “The Economy” in Universidad del Rosario, Facultad de Administración, Rex Hudson ed. Colombia a country study. Washington, D.C.: Administración de Negocios Internacionales. Library of Congress Federal Research Division. FEDEGAN. 2013. “Informe Especial: Proyecto de Ley para el sector lácteo: Qué piden los ganaderos al gobierno?” Carte Fedegan: Marzo-Abril, No. 135. Interview List: Due to the politically sensitive regions in which many of the SMEs are operating, the authors of “Alquería quiere exportar leche desde la costa.” El this case study have decided to withhold the names in Heraldo, April 26, 2016. http://www.elheraldo.co/ final publication of the SMEs and the individuals that economia/alqueria-quiere-exportar-leche-desde-la- participated in interviews for this report. There were 16 total costa-256965 organizations and SMEs that were interviewed. Further information may be provided to interested parties upon request. 13 © 2018 The World Bank Group 1818 H Street NW Washington, DC 20433 Website: www.infodev.org Email: info@infodev.org Twitter: @infoDev Facebook: /infoDevWBG infoD v INNOVATION & ENTREPRENEURSHIP